PRUDENTIAL STRUCTURED MATURITY FUND INC, 497, 1999-03-05

PRUDENTIAL STRUCTURED MATURITY FUND INC
497, 1999-03-05

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FUND TYPE:
_________________________________
Debt

INVESTMENT OBJECTIVE:
_________________________________
High current income consistent with
the preservation of principal

PRUDENTIAL
STRUCTURED MATURITY
FUND, INC.
[LOGO]

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INCOME PORTFOLIO
PROSPECTUS: MARCH 1, 1999

As with all mutual funds, fil-
ing this pro- spectus with the
Securities and Exchange Com-
mission does not mean that the
SEC has approved or disap-
proved the Fund shares, nor
has the SEC determined that
this prospectus is complete or
accurate. It is a criminal of-
fense to state otherwise.
[LOGO] PRUDENTIAL
INVESTMENTS
<PAGE>

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Table of Contents
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<TABLE>
<C> <S>
1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
4 Fees and Expenses
6 How the Fund Invests
6 Investment Objective and Policies
9 Other Investments
11 Derivative Strategies
11 Additional Strategies
13 Investment Risks
16 How the Fund is Managed
16 Manager
16 Investment Adviser
16 Portfolio Manager
16 Distributor
17 Year 2000 Readiness Disclosure
18 Fund Distributions and Tax Issues
18 Distributions
19 Tax Issues
20 If You Sell or Exchange Your Shares
22 How to Buy, Sell and Exchange Shares of the Fund
22 How to Buy Shares
30 How to Sell Your Shares
34 How to Exchange Your Shares
36 Financial Highlights
36 Class A Shares
37 Class B Shares
38 Class C Shares
39 Class Z Shares
40 The Prudential Mutual Fund Family
For More Information (Back Cover)
</TABLE>

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PRUDENTIAL STRUCTURED MATURITY FUND, INC.--INCOME PORTFOLIO
[GRAPHIC] (800) 225-1852

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Risk/Return Summary
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This section highlights key information about the PRUDENTIAL STRUCTURED
MATURITY FUND, INC.--INCOME PORTFOLIO, which we refer to as "the Fund."
Additional information follows this summary.

INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is HIGH CURRENT INCOME CONSISTENT WITH THE
PRESERVATION OF PRINCIPAL. We invest primarily in investment-grade corporate
debt obligations and debt obligations issued by the U.S. Government and
government-related entities that mature in six years or less. These obligations
may include MORTGAGE-RELATED SECURITIES, ASSET-BACKED SECURITIES and dollar-
denominated obligations issued in the U.S. by foreign corporations and
governments (YANKEE OBLIGATIONS).
We structure the Fund's holdings using a "laddered" maturity approach: the
Fund holds six annual maturity categories of debt obligations with maturities
ranging from one year or less to between five and six years. Each maturity
category makes up approximately one-sixth of the Fund's assets. While we make
every effort to achieve our objective, we can't guarantee success.
We may invest up to 10% of the Fund's total assets in NON-INVESTMENT- GRADE
DEBT OBLIGATIONS, which are also known as high-yield or "junk" bonds. The Fund
may also engage in ACTIVE TRADING in order to take advantage of new investment
opportunities or yield differentials.

PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The debt
obligations in which the Fund invests are generally subject to the risk that
the issuer may be unable to make principal and interest payments when they are
due. There is also the risk that the securities could lose value because of
interest rate changes or a loss of confidence in the ability of corporations to
pay back debt. Mortgage-related and asset-backed
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OUR "LADDERING" STRATEGY
Generally speaking, the longer the maturity of a debt obligation, the higher
its yield. However, debt obligations with longer maturities are subject to
greater fluctuations in value in response to interest rate changes than are
debt obligations with shorter maturities. By "laddering" the maturities of the
debt obligations held by the Fund, we attempt to reduce the volatility in the
value of the Fund's shares.

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1
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Risk/Return Summary
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securities are subject to prepayment risk, which means that if they are
prepaid, the Fund may have to replace them with lower-yielding securities. Non-
investment-grade securities are subject to a higher risk of default and tend to
be less liquid than higher rated securities. The Fund's investments in Yankee
obligations involve additional risks. Foreign markets are often more volatile
than U.S. markets, and foreign issuers are generally not subject to regulatory
requirements comparable to those applicable to U.S. issuers. Lastly, active
trading can have adverse tax consequences for the Fund and may result in
greater transaction costs.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.

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PRUDENTIAL STRUCTURED MATURITY FUND, INC.--INCOME PORTFOLIO
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2
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Risk/Return Summary
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EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation. The bar chart and the table below demonstrate the risk of investing
in the Fund and how returns can change from year to year. The table shows how
the Fund's average annual returns compare with those of a broad measure of
market performance. Past performance does not mean that the Fund will achieve
similar results in the future.

[BAR CHART APPEARS HERE]

ANNUAL RETURNS/1/ (CLASS A SHARES)

[BAR GRAPH APPEARS HERE]

9.40% 13.31% 6.67% 7.18% (1.16)% 13.12% 4.32% 6.81% 6.81%
----- ------ ----- ----- ------- ------ ----- ----- -----
1990 1991 1992 1993 1994 1995 1996 1997 1998

BEST QUARTER: 4.43% (2nd quarter of 1995)
WORST QUARTER: -1.36 (1st quarter of 1994)

1 These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown. Without the
management fee waiver and expense reimbursement, the annual returns would
have been lower, too.

AVERAGE ANNUAL RETURNS/1/ (AS OF 12-31-98)
<TABLE>
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<CAPTION>
1 YR 5 YRS SINCE INCEPTION
<S> <C> <C> <C>
Class A shares 3.34% 5.19% 7.03% (since 9-1-89)
Class B shares 3.03% 5.17% 5.38% (since 12-9-92)
Class C shares 3.97% n/a 5.92% (since 8-1-94)
Class Z shares 6.92% n/a 7.13% (since 12-16-96)
Gov't/Corporate Bond Index/2/ 8.44% 6.60% n/a
Lipper Average/3/ 6.60% 5.58% n/a
</TABLE>

1 The Fund's returns are after deduction of sales charges and expenses. Without
the management fee waiver and expense reimbursement, the average annual
return for Class A shares for the period since inception would have been
lower.
2 The Lehman Bros. Intermediate Government/Corporate Bond Index (Gov't/Corp
Bond Index)--an unmanaged index of investment-grade securities issued by the
U.S. Government and its agencies and by corporations with between one and ten
years remaining to maturity--gives a broad look at how short- and
intermediate-term bonds have performed. These returns do not include the
effect of any sales charges. These returns would be lower if they included
the effect of sales charges. Gov't/Corp Bond Index returns since inception of
each class are 8.20% for Class A, 7.10% for Class B, 7.80% for Class C and
8.15% for Class Z shares. Source: Lehman Bros.
3 The Lipper Average is based on the average return of all mutual funds in the
Lipper Short/Intermediate Investment-Grade category without deducting any
sales charges. Again, these returns would be lower if they deducted sales
charges. Lipper returns since inception of each class are 7.26% for Class A,
6.11% for Class B, 6.70% for Class C and 6.61% for Class Z shares. Source:
Lipper, Inc.
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3
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Risk/Return Summary
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FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold each share class of the Fund--Class A, B, C and Z. Each share
class has different sales charges--known as loads--and expenses, but represents
an investment in the same fund. Class Z shares are available only to a limited
group of investors. For more information about which share class may be right
for you, see "How to Buy, Sell and Exchange Shares of the Fund."

SHAREHOLDER FEES/1/ (PAID DIRECTLY FROM YOUR INVESTMENT)
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on 3.25% None 1% None
purchases (as a percentage of offering
price)

Maximum deferred sales charge (load) None 3%/2/ 1%/3/ None
(as a percentage of the lower of original
purchase price or sale proceeds)

Maximum sales charge (load) imposed on None None None None
reinvested dividends and other
distributions

Redemption fees None None None None

Exchange fee None None None None

</TABLE>

ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
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<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .40% .40% .40% .40%
+ Distribution and service (12b-1) fees/4/ .30% 1.00% 1.00% None
+ Other expenses .31% .31% .31% .31%
= TOTAL ANNUAL FUND OPERATING EXPENSES 1.01% 1.71% 1.71% .71%
- Fee waiver or expense reimbursement/4/ .05% .25% .25% None
= NET ANNUAL FUND OPERATING EXPENSES .96% 1.46% 1.46% .71%
</TABLE>

1 Your broker may charge you a separate or additional fee for purchases and
sales of shares.
2 The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the third and fourth years and 0% in the fifth year.
Class B shares convert to Class A shares approximately five years after
purchase.
3 The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
4 The Fund's distribution and service fees have been restated to reflect
current fee levels for Class A shares. For the fiscal year ending December
31, 1999, the Distributor of the Fund has contractually agreed to reduce its
distribution and service fees for Class A, Class B and Class C shares to
.25%, .75% and .75% of the average daily net assets for Class A, Class B and
Class C shares, respectively.

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PRUDENTIAL STRUCTURED MATURITY FUND, INC.--INCOME PORTFOLIO
[GRAPHIC] (800) 225-1852

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Risk/Return Summary
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EXAMPLE
This example will help you compare the fees and expenses of the Fund's
different share classes and compare the cost of investing in the Fund with the
cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same. After the first year, the
example does not take into consideration the Distributor's agreement to reduce
distribution and service fees for Class A, Class B and Class C shares. Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:

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<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $405 $617 $846 $1,504
Class B shares $449 $614 $824 $1,486
Class C shares $347 $609 $996 $2,079
Class Z shares $ 73 $227 $395 $ 883
</TABLE>

You would pay the following expenses on the same investment if you did not sell
your shares:

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<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $405 $617 $846 $1,504
Class B shares $149 $514 $824 $1,486
Class C shares $247 $609 $996 $2,079
Class Z shares $ 73 $227 $395 $ 883
</TABLE>
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5
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How the Fund Invests
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is HIGH CURRENT INCOME CONSISTENT WITH THE
PRESERVATION OF PRINCIPAL. This means that we seek investments that will pay
the Fund interest and other income. While we make every effort to achieve our
objective, we can't guarantee success.
In pursuing our objective, we invest in DEBT OBLIGATIONS OF U.S.
CORPORATIONS and the U.S. GOVERNMENT with maturities of six years or less. We
will buy and sell securities to take advantage of investment opportunities
based on our analysis of market conditions, interest rates and general economic
factors. We structure the Fund's holdings using a "LADDERED" MATURITY APPROACH:
the Fund holds six annual maturity categories of debt obligations with
maturities ranging from one year or less to between five and six years. Each
maturity category makes up approximately one-sixth of the Fund's assets.
We generally buy DEBT OBLIGATIONS OF U.S. CORPORATIONS that are rated at
least BBB by Standard and Poor's Ratings Group (S&P) or Baa by Moody's
Investors Service (Moody's) or the equivalent by another major rating service.
A rating is an assessment of the likelihood of timely payment of debt and can
be useful when comparing different debt obligations. These ratings are not a
guarantee of quality. The opinions of the rating agencies do not reflect market
risk and they may at times lag behind the current financial condition of a
company.
Debt obligations rated BBB by S&P and Baa by Moody's are regarded as
investment-grade, but have speculative characteristics and are riskier than
higher rated securities. Adverse economic developments are more likely to
affect the payment of interest and principal on debt obligations rated BBB/Baa
than on higher rated debt obligations. We may also invest up to 10% of the
Fund's total assets in debt obligations rated BB by S&P or Ba by Moody's or the
equivalent by another major rating service. Obligations rated BB by S&P or Ba
by Moody's are considered to be speculative with respect to capacity to pay
interest and principal and are commonly referred to as "junk" bonds. These
securities generally offer higher yields than higher rated debt obligations,
but present higher credit risks. We may also invest in debt obligations that
are not rated, but which we believe are of comparable quality to the debt
obligations described above. If the rating of a debt obligation is downgraded
after the Fund purchases it (or if the debt obligation is no longer rated), we
will not have

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PRUDENTIAL STRUCTURED MATURITY FUND, INC.--INCOME PORTFOLIO
[GRAPHIC] (800) 225-1852

6
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How the Fund Invests
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to sell the security, but we will take this into consideration in deciding
whether the Fund should continue to hold the security.
The Fund may also invest in DEBT OBLIGATIONS ISSUED BY THE U.S. TREASURY.
Treasury securities have varying interest rates and maturities, but they are
all backed by the full faith and credit of the U.S. Government.
The Fund may also invest in other DEBT OBLIGATIONS ISSUED OR GUARANTEED BY
THE U.S. GOVERNMENT and government-related entities. Some of these debt
securities are backed by the full faith and credit of the U.S. Government,
which means that payment of interest and principal is guaranteed, but yield and
market value are not. These include obligations of the Government National
Mortgage Association (GNMA or "Ginnie Mae"). Debt securities issued by other
government entities, like obligations of the Federal National Mortgage
Association (FNMA or "Fannie Mae") and the Student Loan Marketing Association
(SLMA or "Sallie Mae"), are not backed by the full faith and credit of the U.S.
Government. However, these issuers have the right to borrow from the U.S.
Treasury to meet their obligations. In contrast, the debt securities of other
issuers, like the Farm Credit System, depend entirely upon their own resources
to repay their debt.
The Fund may also invest in YANKEE OBLIGATIONS, which are dollar-denominated
debt obligations issued in the U.S. by foreign corporations and governments.
During the year ended December 31, 1998, the monthly dollar weighted average
ratings of the debt obligations held by the Fund, expressed as a percentage of
the Fund's total investments, were as follows:

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<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RATINGS INVESTMENTS
<S> <C>
AAA/Aaa 25.6%
AA/Aa 2.4%
A/A 7.7%
BBB/Baa 55.1%
BB/Ba 2.5%
B/B 5.7%
Unrated 0%
</TABLE>

The Fund's dollar-weighted average portfolio maturity will generally be
between 2 1/2 and 3 1/2 years.

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7
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How the Fund Invests
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MORTGAGE-RELATED SECURITIES
The Fund invests in MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S.
governmental entities or private issuers. These securities are usually pass-
through instruments that pay investors a share of all interest and principal
payments from an underlying pool of fixed or adjustable rate mortgages.
Mortgage-related securities issued by the U.S. Government or its agencies
include FNMAs, GNMAs and debt securities issued by the Federal Home Loan
Mortgage Corporation (FHLMC or "Freddie Mac"). The U.S. Government or the
issuing agency directly or indirectly guarantees the payment of interest and
principal on these securities. Private mortgage-related securities that are not
guaranteed by U.S. governmental entities generally have one or more types of
credit enhancement to ensure timely receipt of payments and to protect against
default.
Mortgage pass-through securities include collateralized mortgage
obligations, multi-class pass-through securities and stripped mortgage-backed
securities. A COLLATERALIZED MORTGAGE OBLIGATION (CMO) is a security backed by
an underlying portfolio of mortgages or mortgage-backed securities that may be
issued or guaranteed by a bank or by U.S. governmental entities. We may invest
up to 30% of the Fund's net assets in CMOs. A MULTI-CLASS PASS-THROUGH SECURITY
is an equity interest in a trust composed of underlying mortgage assets.
Payments of principal of and interest on the mortgage assets and any
reinvestment income thereon provide the funds to pay debt service on the CMO or
to make scheduled distributions on the multi-class pass-through security. A
STRIPPED MORTGAGE-BACKED SECURITY (MBS STRIP) may be issued by U.S.
governmental entities or by private institutions. MBS strips take the pieces of
a debt security (principal and interest) and break them apart. The resulting
securities may be sold separately and may perform differently.
The values of mortgage-related securities vary with changes in market
interest rates generally and in yields among various kinds of mortgage-related
securities. Such values are particularly sensitive to changes in prepayments of
the underlying mortgages. For example, during periods of falling interest
rates, prepayments tend to accelerate as homeowners and others refinance their
higher rate mortgages; these prepayments reduce the anticipated duration of the
mortgage-related securities. Conversely, during periods of rising interest
rates, prepayments can be expected to decelerate, which has the effect of
extending the anticipated duration at the same time

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PRUDENTIAL STRUCTURED MATURITY FUND, INC.--INCOME PORTFOLIO
[GRAPHIC] (800) 225-1852

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How the Fund Invests
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that the value of the securities declines. MBS strips tend to be even more
highly sensitive to changes in prepayment and interest rates than mortgage-
related securities and CMOs generally.

ASSET-BACKED SECURITIES
We may invest up to 25% of the Fund's net assets in privately-issued ASSET-
BACKED DEBT SECURITIES. An asset-backed security is another type of pass-
through instrument that pays interest based upon the cash flow of an underlying
pool of assets, such as automobile loans and credit card receivables.

ACTIVE TRADING
The Fund may also engage in ACTIVE TRADING--that is, frequent trading of its
securities--in order to take advantage of new investment opportunities or yield
differentials. There may be tax consequences, such as a possible increase in
short-term capital gains or losses, when the Fund sells a security without
regard to how long it has held the security. In addition, active trading may
result in greater transaction costs, which will reduce the Fund's return.

* * *

For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover
page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies that are not fundamental.

OTHER INVESTMENTS
In addition to the above principal strategies, we may also use the following
investment strategies to increase the Fund's returns or protect its assets if
market conditions warrant.

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9
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How the Fund Invests
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U.S. TREASURY STRIPS
The U.S. Treasury sometimes "strips" Treasury debt obligations into their
component parts: the Treasury's obligation to make periodic interest payments
and its obligation to repay the amount borrowed. These STRIPPED SECURITIES are
sold to investors separately. Stripped securities do not make periodic interest
payments. They are usually sold at a discount and then redeemed for their face
value on their maturity dates. These securities increase in value when interest
rates fall and lose value when interest rates rise. However, the value of
stripped securities generally fluctuates more in response to interest rate
movements than the value of traditional bonds. The Fund may try to earn money
by buying stripped securities at a discount and either selling them after they
increase in value or holding them until they mature.

MONEY MARKET INSTRUMENTS
The Fund may invest in MONEY MARKET INSTRUMENTS, including the commercial paper
of U.S. corporations, short-term obligations of U.S. banks, certificates of
deposit and short-term obligations issued or guaranteed by the U.S. Government
or its agencies. The Fund will only purchase money market instruments in one of
the two highest short-term quality ratings of a major rating service.

TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in high quality money market
instruments and repurchase agreements for defensive purposes. Investing heavily
in these securities limits our ability to achieve high current income, but may
help to preserve the Fund's assets when the markets are unstable.

REPURCHASE AGREEMENTS
The Fund may also use REPURCHASE AGREEMENTS where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. A repurchase agreement is like a loan by the Fund to the other party that
creates a fixed return for the Fund.

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PRUDENTIAL STRUCTURED MATURITY FUND, INC.--INCOME PORTFOLIO
[GRAPHIC] (800) 225-1852

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How the Fund Invests
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DERIVATIVE STRATEGIES
We may use alternative derivative strategies to try to improve the Fund's
returns or protect its assets, although we cannot guarantee they will work,
that the instruments necessary to implement these strategies will be available
or that the Fund will not lose money. Derivatives--such as futures, options,
and options on futures--involve costs and can be volatile. A futures contract
is an agreement to buy or sell a set quantity of an underlying product at a
future date, or to make or receive a cash payment based on the value of a
securities index. An option is the right to buy or sell securities, or in the
case of an option on a futures contract, the right to buy or sell a futures
contract, in exchange for a premium. With derivatives, the investment adviser
tries to predict whether the underlying investment--a security, market index,
currency, interest rate or some other benchmark--will go up or down at some
future date. We may use derivatives to try to reduce risk or to increase return
consistent with the Fund's overall investment objective. The investment adviser
will consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we may
use may not match the Fund's underlying holdings. For more information about
these strategies, see the SAI, "Description of the Fund, Its Investments and
Risks--Risks of Hedging and Return Enhancement Strategies."

ADDITIONAL STRATEGIES
The Fund may also use additional strategies, such as purchasing securities on a
WHEN-ISSUED or DELAYED-DELIVERY basis. When the Fund makes this type of
purchase, the price and interest rate are fixed at the time of purchase, but
delivery and payment for the obligations take place at a later time. The Fund
does not earn interest income until the date the obligations are delivered.
The Fund also follows certain policies when it BORROWS MONEY (the Fund can
borrow up to 20% of the value of its total assets); LENDS ITS SECURITIES to
others (the Fund can lend up to 30% of the value of its total assets, including
collateral received in the transaction); HOLDS ILLIQUID SECURITIES (the Fund
may hold up to 15% of its net assets in illiquid securities, including
securities with legal or contractual restrictions, those without a readily
available market and repurchase agreements with maturities longer than seven
days). The Fund is subject to certain
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11
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How the Fund Invests
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investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.

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PRUDENTIAL STRUCTURED MATURITY FUND, INC.--INCOME PORTFOLIO
[GRAPHIC] (800) 225-1852

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How the Fund Invests
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INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indices, performance of the Fund can deviate from performance of the indices.
This chart outlines the key risks and potential rewards of the Fund's principal
and other investments. See, too, "Description of the Fund, Its Investments and
Risks" in the SAI.

INVESTMENT TYPE
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS

DEBT OBLIGATIONS . Credit risk--risk . Regular interest
that the borrower income
At least 80% can't pay back . The U.S. Govern-
the money bor- ment guarantees
rowed or make in- interest and
terest payments principal pay-
ments on certain
securities
. Market risk--risk
that bonds may . Generally more
lose value in the secure than stock
market because since companies
interest rates must pay their
change or there debts before they
is a lack of con- pay dividends
fidence in the
borrower

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. Prepayment risk-- . Regular interest
MORTGAGE-RELATED risk that the un- income
SECURITIES derlying mortgage . The U.S. Govern-
may be prepaid ment guarantees
partially or com- interest and
pletely, gener- principal pay-
ally during peri- ments on certain
ods of falling securities
interest rates,
which could ad-
versely affect
yield to maturity
and require the
Fund to reinvest
in lower-yielding
securities

Percentage varies
. May benefit from
security interest
in real estate
collateral
. Pass-through in-
struments provide
greater diversi-
fication than di-
rect ownership of
loans
. Credit risk--that
the underlying
mortgages will
not be paid by
debtors or by
credit insurers
or guarantors of
such instruments.
Some private
mortgage securi-
ties are
unsecured or se-
cured by lower-
rated insurers or
guarantors and
thus may involve
greater risk
. Market risk

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13
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How the Fund Invests
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INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
ASSET-BACKED . Prepayment risk . Regular interest
SECURITIES . The security in- income
(PRIVATELY- terest in the un- . Prepayment risk
ISSUED) derlying collat- is generally
eral is not as lower than with
great as with mortgage-related
mortgage-related securities
securities

Up to 25% of net
assets
. Pass-through in-
struments provide
. Credit risk--that greater diversi-
the underlying fication than di-
receivables will rect ownership of
not be paid by loans
debtors or by
credit insurers
or guarantors of
such instruments.
Some asset-backed
securities are
unsecured or se-
cured by lower-
rated insurers or
guarantors and
thus may involve
greater risk
. Market risk

- --------------------------------------------------------------------------------

YANKEE . Offers exposure
OBLIGATIONS to foreign mar-
kets and issuers
operating in
those markets

. Foreign markets,
Percentage varies economies and po-
litical systems
may not be as
stable as in the
U.S. . Opportunities for
diversification
. May be less liq-
uid than U.S.
debt obligations
. Differences in
foreign laws, ac-
counting stan-
dards and public
information about
issuers
. Year 2000
conversion may be
more of a problem
for some foreign
issuers

- --------------------------------------------------------------------------------

. Higher credit . May offer higher
HIGH-YIELD DEBT risk than higher interest income
SECURITIES (JUNK grade debt than higher grade
BONDS) securities debt securities
. Higher market
Up to 10% of to- risk than higher
tal assets grade debt
securities
. May be more il-
liquid (harder to
value and sell),
in which case
valuation would
depend more on
investment advis-
er's judgment
than is generally
the case with
higher-rated se-
curities

- --------------------------------------------------------------------------------

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- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------

INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS

DERIVATIVES

. Derivatives such . The Fund could
Percentage varies as futures and make money and
options may not protect against
fully offset the losses if the in-
underlying posi- vestment analysis
tions and this proves correct
could result in
losses to the . One way to manage
Fund that would the Fund's
not have other- risk/return bal-
wise occurred ance by locking
in the value of
. Derivatives used an investment
for risk manage- ahead of time
ment may not have
the intended ef-
fects and may re-
sult in losses or . Derivatives that
missed opportuni- involve leverage
ties could generate
substantial gains
. The other party at low cost
to a derivatives
contract could
default
. Derivatives that
involve leverage
could magnify
losses
. Certain types of
derivatives in-
volve costs to
the Fund which
can reduce re-
turns

- --------------------------------------------------------------------------------
ILLIQUID
SECURITIES

. May be difficult . May offer a more
Up to 15% of net to value pre- attractive yield
assets cisely or potential for
. May be difficult growth than more
to sell at the widely traded se-
time or price de- curities
sired

- --------------------------------------------------------------------------------
MONEY MARKET . Limits potential . May preserve the
INSTRUMENTS for capital ap- Fund's assets
preciation

Up to 100% on a . Credit risk
temporary basis . Market risk

- --------------------------------------------------------------------------------

15
<PAGE>

- --------------------------------------------------------------------------------
How the Fund is Managed
- --------------------------------------------------------------------------------

MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077

Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. For the fiscal year
ended December 31, 1998, the Fund paid PIFM management fees of .40% of the
Fund's average net assets.
As of January 31, 1999, PIFM served as the Manager to all 47 of the
Prudential Mutual Funds, and as Manager or administrator to 22 closed-end
investment companies, with aggregate assets of approximately $71.7 billion.

INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.

PORTFOLIO MANAGER
Prudential Investments' fixed-income group is organized by teams that
specialize by sector. The Fixed Income Investment Policy Committee, which is
comprised of senior investment staff from each sector team, provides guidance
to the teams regarding duration risk, asset allocations and general risk
parameters. Portfolio manager ANTHONY RODRIGUEz contributes bottom-up
securities selection within those guidelines and is responsible for the day-to-
day management of the Fund.
Mr. Rodriguez, a Managing Director of Prudential Investments, has managed
the Fund since 1995. Mr. Rodriguez has been a portfolio manager for Prudential
Investments since 1988. He also manages the bond portions of the Prudential
Series Fund--Conservative Balanced and Flexible Managed Portfolios.

DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund

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<PAGE>

- --------------------------------------------------------------------------------
How the Fund is Managed
- --------------------------------------------------------------------------------

has Distribution and Service Plans under Rule 12b-1 of the Investment Company
Act. Under the Plans and the Distribution Agreement, PIMS pays the expenses of
distributing the Fund's Class A, B, C and Z shares and provides certain
shareholder support services. The Fund pays distribution and other fees to PIMS
as compensation for its services for each class of shares other than Class Z.
These fees--known as 12b-1 fees--are shown in the "Fees and Expenses" table.

YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Fund that they have been actively working on necessary changes to their
computer systems to prepare for the year 2000. The Fund and its Directors
receive and have received since early 1998 satisfactory quarterly reports from
the principal service providers as to their preparations for year 2000
readiness, although there can be no assurance that the service providers (or
other securities market participants) will successfully complete the necessary
changes in a timely manner or that there will be no adverse impact on the Fund.
Moreover, the Fund at this time has not considered retaining alternative
service providers or directly undertaken efforts to achieve year 2000
readiness, the latter of which would involve substantial expenses without an
assurance of success.
Additionally, issuers of securities generally as well as those purchased by
the Fund may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of the securities
held by the Fund.

- --------------------------------------------------------------------------------

17
<PAGE>

- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------

Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA) or some other qualified tax-deferred plan or account.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless your shares are
held in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.

DISTRIBUTIONS
The Fund distributes DIVIDENDS of any net investment income to shareholders,
typically every month. For example, if the Fund owns an ACME Corp. bond and the
bond pays interest, the Fund will pay out a portion of this interest as a
dividend to its shareholders, assuming the Fund's income is more than its costs
and expenses. The dividends you receive from the Fund will be taxed as ordinary
income, whether or not they are reinvested in the Fund.
The Fund also distributes realized net CAPITAL GAIN to shareholders--
typically once a year--which are generated when the Fund sells its assets for a
profit. For example, if the Fund bought a bond issued by ACME Corp. for $1,000
and more than one year later sold it for $1,500, the Fund has net long-term
capital gains of $500, which it will pass on to shareholders (assuming the
Fund's total gains are greater than any losses it may have). Capital gains are
taxed differently depending on how long the Fund holds the security--if a
security is held more than one year before it is sold, LONG-TERM capital gains
are taxed at the rate of 20%, but if the security is held one year or less,
SHORT-TERM capital gains are taxed at ordinary income rates of up to 39.6%.
Different rates apply to corporate shareholders.
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a

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<PAGE>

- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------

broker you will receive a credit to your account. Either way, the distributions
may be subject to taxes, unless your shares are held in a qualified tax-
deferred plan or account. For more information about automatic reinvestment and
other shareholder services, see "Step 4: Additional Shareholder Services" in
the next section.

TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and long-term capital gains we distributed to you during the prior year. If you
own shares of the Fund as part of a qualified tax-deferred plan or account,
your taxes are deferred, so you will not receive a Form 1099. However, you will
receive a Form 1099 when you take any distributions from your qualified tax-
deferred plan or account.
Fund distributions are generally taxable to you in the year they are
received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the
dividends are treated as if they were paid on December 31 of the prior year.

WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your tax
identification number and certifications as to your tax status, and you fail to
do this, we will generally withhold and pay to the U.S. Treasury 31% of your
taxable distributions and gross sale proceeds. If you are subject to backup
withholding, we will generally withhold and pay to the U.S. Treasury 31% of
your taxable distributions and gross sale proceeds. Dividends of net investment
income and short-term capital gains paid to a nonresident foreign shareholder
generally will be subject to a U.S. withholding tax of 30%. This rate may be
lower, depending on any tax treaty the U.S. may have with the shareholder's
country.

IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well, since you bought

- --------------------------------------------------------------------------------

19
<PAGE>

- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------

shares one day and soon after received a distribution. That is not so because
when dividends are paid out, the value of each share of the Fund decreases by
the amount of the dividend and the market changes (if any) to reflect the
payout. The distribution you receive makes up for the decrease in share value.
However, the timing of your purchase does mean that part of your investment
came back to you as taxable income.

QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential Mutual Funds that are
suitable for retirement plans offered by Prudential.

IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have realized a capital
gain, which is subject to tax, unless you hold shares in a qualified tax-
deferred plan or account. For individuals, the maximum capital gains tax rate
is 20% for shares held for more than twelve months. If you sell shares of the
Fund for a loss, you may have a capital loss, which you may use to offset
certain capital gains you have.
Exchanging your shares of the Fund for the shares of another Prudential
Mutual Fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the
taxes described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your
- ----------------------------------------

CAPITAL GAIN
(taxes owed)
RECEIPTS
FROM SALE [GRAPHIC] OR

CAPITAL LOSS
(offset against gain)

- ----------------------------------------

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PRUDENTIAL STRUCTURED MATURITY FUND, INC.--INCOME PORTFOLIO
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<PAGE>

- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------

financial adviser should keep track of the dates on which you buy and sell--or
exchange--Fund shares, as well as the amount of any gain or loss on each
transaction. For tax advice, please see your tax adviser.

AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately five years after
purchase--is not a "taxable event" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service (IRS). For more information about the automatic conversion of
Class B shares, see "Class B Shares Convert to Class A Shares After
Approximately Five Years" in the next section.

- --------------------------------------------------------------------------------

21
<PAGE>

How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Fund
- --------------------------------------------------------------------------------

HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services
LLC (PMFS) at (800) 225-1852 or contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020

To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.

STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within four years (that is why it is called a Contingent
Deferred Sales Charge, or CDSC) but the operating expenses each year are higher
than the Class A share expenses. With Class C shares, you pay a 1% front-end
sales charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
. The amount of your investment
. The length of time you expect to hold the shares and the impact of the
varying distribution fees

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[GRAPHIC] (800) 225-1852

22
<PAGE>

. The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
. Whether you qualify for any reduction or waiver of sales charges
. The fact that Class B shares automatically convert to Class A shares
approximately five years after purchase
. Whether you qualify to purchase Class Z shares
See "How to Sell Your Shares" for a description of the impact of CDSCs.

Share Class Comparison. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you
are entitled to a reduction or waiver of any sales charges.

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z

<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount/1/

Minimum amount for $100 $100 $100 None
subsequent purchases/1/

Maximum initial 3.25% of the public None 1% of the public None
sales charge offering price offering price

Contingent Deferred None If Sold During: 1% on sales None
Sales Charge Year 1 3% made within
(CDSC)/2/ Year 2 2% 18 months of
Year 3 1% purchase/2/
Year 4 1%
Year 5 0%
Annual distribution and .30 of 1%; 1%; 1%; None
service (12b-1) fees (.25 of 1% (.75 of 1% (.75 of 1%
shown as a percentage of currently) currently) currently)
average net assets/3/
</TABLE>

1 The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum initial
and subsequent investment for purchases made through the Automatic Investment
Plan is $50. For more information, see "Additional Shareholder Services-
Automatic Investment Plan."

2 For more information about the CDSC and how it is calculated, see "How to
Sell Your Shares--Contingent Deferred Sales Charges (CDSC)." Class C shares
bought before November 2, 1998 have a 1% CDSC if sold within one year.

3 These distribution fees are paid from the Fund's assets on a continuous
basis. Over time, the fees will increase the cost of your investment and may
cost you more than paying other types of sales charges. The service fee for
Class A, Class B and Class C shares is .25 of 1%. The distribution fee for
Class A shares is limited to .30% of 1% (including the .25 of 1% service fee)
and .75 of 1% for Class B and Class C shares.

- --------------------------------------------------------------------------------

23
<PAGE>

REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.

Increase the Amount of Your Investment. You can reduce Class A's sales charge
by increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
<S> <C> <C> <C>
Less than $99,999 3.25% 3.36% 3.00%
$100,000 to $249,999 2.75% 2.83% 2.50%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.55%
$1 million and above* None None None
</TABLE>

* If you invest $1 million or more, you can buy only Class A shares, unless you
qualify to buy Class Z shares.

To satisfy the purchase amounts above, you can:
. invest with an eligible group of related investors;
. buy the Class A shares of two or more Prudential Mutual Funds at the
same time;
. use your RIGHTS OF ACCUMULATION, which allow you to combine the value of
Prudential Mutual Fund shares you already own with the value of the
shares you are purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent if you qualify
for Rights of Accumulation); or
. sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares in
the Fund and other Prudential Mutual Funds within 13 months.

Benefit Plans. Benefit Plans can avoid Class A's initial sales charges if the
Benefit Plan has existing assets of at least $1 million invested in shares of
Prudential Mutual Funds (excluding money market funds other than those acquired
under the exchange privilege) or 250 eligible employees or participants. For
these purposes, a Benefit Plan is a pension, profit-sharing or other employee
benefit plan qualified under Section 401 of the Internal Revenue Code, a
deferred compensation or annuity plan under Sections

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<PAGE>

403(b) and 457 of the Internal Revenue Code, a "rabbi" trust or a nonqualified
deferred compensation plan sponsored by an employer that has a tax-qualified
benefit plan with Prudential. Class A shares may also be purchased without a
sales charge by participants who are repaying loans from Benefit Plans where
Prudential (or its affiliates) provides administrative or recordkeeping
services, sponsors the product or provides account services.
Certain Prudential retirement programs--such as PruArray Association Benefit
Plans and PruArray Savings Programs--may also be exempt from Class A's sales
charge. For more information, see the SAI or contact your financial adviser. In
addition, waivers are available to investors in certain programs sponsored by
brokers, investment advisers and financial planners who have agreements with
Prudential Investments Advisory Group relating to:
. Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades and charges its clients a management, consulting or other
fee for its services; and
. Mutual fund "supermarket" programs where the sponsor links its
customers' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.

Other Types of Investors. Other investors pay no sales charges, including
certain officers, employees or agents of Prudential and its affiliates,
Prudential Mutual Funds, the subadvisers of the Prudential Mutual Funds and
clients of brokers that have entered into a selected dealer agreement with the
Distributor. To qualify for a reduction or waiver of the sales charge, you must
notify the Transfer Agent or your broker at the time of purchase. For more
information about reducing or eliminating Class A's sales charge, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Reduction and Waiver of
Initial Sales Charges--Class A Shares."

WAIVING CLASS C'S INITIAL SALES CHARGE
Benefit Plans. Benefit Plans (as defined above) may purchase Class C shares
without paying an initial sales charge. Class C shares may also be purchased
without an initial sales charge by participants who are repaying loans from
Benefit Plans where Prudential (or its affiliates) provides administrative or
recordkeeping services, sponsors the product or provides account services.

- --------------------------------------------------------------------------------

25
<PAGE>

Prudential Retirement Plans. The initial sales charge will be waived for
purchases of Class C shares by both qualified and nonqualified retirement and
deferred compensation plans participating in a PruArray Plan and other plans if
Prudential also provides administrative or recordkeeping services.

Investment of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must:
. purchase your shares through an account at Prudential Securities,
. purchase your shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation, or
. purchase your shares through another broker.

This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any
supporting documents it considers to be appropriate.

QUALIFYING FOR CLASS Z SHARES
Class Z shares of the Fund can be purchased by any of the following:
. Any Benefit Plan as defined above, and certain nonqualified plans,
provided the Benefit Plan--in combination with other plans sponsored by
the same employer or group of related employers-- has at least $50
million in defined contribution assets
. Participants in any fee-based program or trust program sponsored by
Prudential or an affiliate which includes mutual funds as investment
options and the Fund as an available option
. Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential Mutual Funds are an available option
. Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services, and as of September 20,

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[GRAPHIC] (800) 225-1852

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<PAGE>

1996, were either Class Z shareholders of the Prudential Mutual Funds or
executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds
. Current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund)
. Employees of Prudential and/or Prudential Securities who participate in
a Prudential-sponsored employee savings plan
. Prudential with an investment of $10 million or more

In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of
the purchase price for Class C shares and a finder's fee for Class Z shares
from their own resources based on a percentage of the net asset value of shares
sold or otherwise.

CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY FIVE YEARS
If you buy Class B shares and hold them for approximately five years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you received with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of Class B shares converted if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--
Conversion Feature--Class B Shares."

- --------------------------------------------------------------------------------

27
<PAGE>

- --------------------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. bonds
in its portfolio and the price of ACME bonds goes up, while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.

- --------------------------------------------------------------------------------
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV--is
determined by a simple calculation--it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by Fund XYZ
(minus its expenses) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Fund's Board.
Most national newspapers report the NAVs of most mutual funds, which allows
investors to check the price of mutual funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York time on days that the New York Stock Exchange is open for trading. We do
not determine NAV on days when we have not received any orders to purchase,
sell or exchange Fund shares, or when changes in the value of the Fund's
portfolio do not materially affect the NAV.

WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an
initial sales charge (unless you're entitled to a waiver). For Class B and
Class Z shares, you will pay the NAV next determined after we receive your
order to purchase (remember, there are no up-front sales charges for these
share classes). Your broker may charge you a separate or additional fee for
purchases of shares.

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28
<PAGE>

STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:

Automatic Reinvestment. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date
we determine who receives dividends:

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015

Automatic Investment Plan. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.

Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs, or SEP-IRAs for a one-person
business, please contact your financial adviser. If you are interested in
opening a 401(k) or other company-sponsored retirement plan (SIMPLES, SEP
plans, Keoghs, 403(b) plans, pension and profit-sharing plans), your financial
adviser will help you determine which retirement plan best meets your needs.
Complete instructions about how to establish and maintain your plan and how to
open accounts for you and your employees will be included in the retirement
plan kit you receive in the mail.

The PruTector Program. Optional group term life insurance--which protects the
value of your Prudential Mutual Fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and
is not available in all states.

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29
<PAGE>

Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.

Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.

HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer
Agent, the Distributor or your broker receives your order to sell (less any
applicable CDSC). If your broker holds your shares, he must receive your order
to sell by 4:15 p.m. New York time to process the sale on that day. Otherwise,
contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010

Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by
wire, certified check or cashier's check. Your broker may charge you a separate
or additional fee for sales of shares.

RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This

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may happen during unusual market conditions or emergencies when the Fund can't
determine the value of its assets or sell its holdings. For more information,
see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $50,000 of shares, you want the check sent to
someone or someplace that is not in our records or you are a business or a
trust and if you hold your shares directly with the Transfer Agent, you may
have to have the signature on your sell order guaranteed by a financial
institution. For more information, see the SAI, "Purchase, Redemption and
Pricing of Fund Shares--Sale of Shares--Signature Guarantee."

CONTINGENT DEFERRED SALES CHARGES (CDSC)
If you sell Class B shares within four years of purchase or Class C shares
within 18 months of purchase (one year for Class C shares purchased before
November 2, 1998), you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell amounts representing shares in the following order:

. Amounts representing shares you purchased with reinvested dividends and
distributions
. Amounts representing the increase in NAV above the total amount of
payments for shares made during the past four years for Class B shares
and 18 months for Class C shares (one year for Class C shares purchased
before November 2, 1998)
. Amounts representing the cost of shares held beyond the CDSC period (four
years for Class B shares and 18 months for Class C shares)

Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the
cost of shares held for the longest period of time within the applicable CDSC
period.
As we noted before in the "Share Class Comparison" chart, the CDSC for Class
B shares is 3% in the first year, 2% in the second and 1% in the

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31
<PAGE>

third and fourth years. The rate decreases on the first day of the month
following the anniversary date of your purchase, not on the anniversary date
itself. The CDSC is 1% for Class C shares--which is applied to shares sold
within 18 months of purchase (one year for Class C shares purchased before
November 2, 1998). For both Class B and Class C shares, the CDSC is calculated
based on the lesser of the original purchase price or the redemption proceeds.
For purposes of determining how long you've held your shares, all purchases
during the month are grouped together and considered to have been made on the
last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding
any time shares were held in a money market fund.

WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
. After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy (with
rights of survivorship), provided the shares were purchased before the
death or disability
. To provide for certain distributions--made without IRS penalty--from a
tax-deferred retirement plan, IRA or Section 403(b) custodial account
. On certain sales from a Systematic Withdrawal Plan

For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charges--Class B Shares."

WAIVER OF THE CDSC--CLASS C SHARES
Prudential Retirement Plans. The CDSC will be waived for purchases of Class C
shares by both qualified and nonqualified retirement and deferred compensation
plans participating in a PruArray Plan and other plans if Prudential also
provides administrative or recordkeeping services. The CDSC will also be waived
on redemptions sponsored by Prudential and its affiliates to the extent that
the redemption proceeds are invested in the Guaranteed Investment Account (a
group annuity insurance product

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<PAGE>

sponsored by Prudential), the Guaranteed Insulated Separate Account (a separate
account offered by Prudential) and shares of The Stable Value Fund (an
unaffiliated bank collective fund).

Other Benefit Plans. The CDSC will be waived on redemptions from Benefit Plans
holding shares through a broker not affiliated with Prudential and for which
the broker provides administrative or recordkeeping services.

REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.

SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your
account. We would do this to minimize the Fund's expenses paid by other
shareholders. We will give you 60 days' notice, during which time you can
purchase additional shares to avoid this action. This involuntary sale does not
apply to shareholders who own their shares as part of a 401(k) plan, an IRA or
some other tax-deferred plan or account.

90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares
to reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."

RETIREMENT PLANS
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are

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33
<PAGE>

special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by your
employer or plan trustee, you must arrange for the distribution request to be
signed and sent by the plan administrator or trustee. For additional
information, see the SAI.

HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in
certain other Prudential Mutual Funds--including certain money market funds--if
you satisfy the minimum investment requirements. For example, you can exchange
Class A shares of the Fund for Class A shares of another Prudential Mutual
Fund, but you can't exchange Class A shares for Class B, Class C or Class Z
shares. Class B and Class C shares may not be exchanged into money market funds
other than Prudential Special Money Market Fund, Inc. After an exchange, at
redemption, the CDSC will be calculated from the first day of the month after
initial purchase, excluding any time shares were held in a money market fund.
We may change the terms of the exchange privilege after giving you 60 days'
notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010

There are no sales charges for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately four years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding period for CDSC
liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange

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34
<PAGE>

are worth more than you paid for them, you may have to pay capital gains tax.
For additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase either Class A
shares without paying an initial sales charge or Class Z shares, we will
automatically exchange your Class B or Class C shares which are not subject to
a CDSC for Class A or Class Z shares, as appropriate. We make such exchanges on
a quarterly basis, if you qualify for this exchange privilege. We have obtained
a legal opinion that this exchange is not a "taxable event" for federal income
tax purposes. This opinion is not binding on the IRS.

FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Fund will
have to invest. When in our opinion such activity would have a disruptive
effect on portfolio management, the Fund reserves the right to refuse purchase
orders and exchanges into the Fund by any person, group or commonly controlled
accounts. The Fund may notify a market timer of rejection of an exchange or
purchase order after the day the order is placed. If the Fund allows a market
timer to trade Fund shares, it may require the market timer to enter into a
written agreement to follow certain procedures and limitations.

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35
<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------

The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.

CLASS A SHARES
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.

<TABLE>
<CAPTION>
CLASS A SHARES (FISCAL YEARS ENDED 12-31)
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD: $11.35 $11.36 $11.63 $10.97 $11.78
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .68 .74 .73 .73 .65
Net realized and unrealized gain
(loss) on investment transactions .07 .01 (.25) .66 (.80)
TOTAL FROM INVESTMENT OPERATIONS .75 .75 .48 1.39 (.15)
- ------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.68)% (.74) (.73) (.73) (.65)
Distributions in excess of net
investment income --% (.02) (.02) -- (.01)
Distributions from net realized
gains --% -- -- -- --
TOTAL DISTRIBUTIONS (.68)% (.76) (.75) (.73) (.66)
NET ASSET VALUE, END OF YEAR 11.42% $11.35 $11.36 $11.63 $10.97
TOTAL RETURN/1/ 6.81% 6.81% 4.32% 13.12% (1.16)%
- ------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $85,213 $65,431 $77,031 $88,982 $91,680
Average net assets (000) 73,382 $70,899 $81,745 $89,500 $106,737
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees .81% .94% .86% .82% .94%
Expenses, excluding distribution
fees .71% .84% .76% .72% .84%
Net investment income 5.98% 6.51% 6.38% 6.57% 5.88%
Portfolio turnover 301% 180% 170% 160% 123%
</TABLE>
- --------------------------------------------------------------------------------
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.

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- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------

CLASS B SHARES
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.

<TABLE>
<CAPTION>
CLASS B SHARES (FISCAL YEARS ENDED 12-31)
- -------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $11.35 $11.36 $11.63 $10.97 $11.78
INCOME FROM INVESTMENT
OPERATIONS
Net investment income .61 .67 .65 .66 .58
Net realized and unrealized gain
(loss) on investment
transactions .06 .01 (.25) .66 (.80)
TOTAL FROM INVESTMENT OPERATIONS .67 .68 .40 1.32 (.22)
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment
income (.61) (.67) (.65) (.66) (.58)
Distributions in excess of net
investment income -- (.02) (.02) -- (.01)
Distributions from net realized
gains -- -- -- -- --
TOTAL DISTRIBUTIONS (.61) (.69) (.67) (.66) (.59)
NET ASSET VALUE, END OF PERIOD $ 11.41 $11.35 $11.36 $11.63 $10.97
TOTAL RETURN/1/ 6.03% 6.13% 3.64% 12.40% (1.83)%
- -------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $39,694 $71,030 $ 94,490 $120,188 $130,258
Average net assets (000) $56,913 $81,673 $106,224 $125,230 $134,985
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees 1.46% 1.59% 1.51% 1.47% 1.66%
Expenses, excluding distribution
fees .71% .84% .76% .72% .84%
Net investment income 5.36% 5.87% 5.73% 5.92% 5.17%
Portfolio turnover 301% 180% 170% 160% 123%
</TABLE>
- --------------------------------------------------------------------------------
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.

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37
<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------

CLASS C SHARES
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the two years ended December 31, 1996 and the period from August
1, 1994 through December 31, 1994 were audited by other independent auditors,
whose reports were unqualified.

<TABLE>
<CAPTION>
CLASS C SHARES (FISCAL YEARS ENDED 12-31)
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994/1/
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.35 $11.36 $11.63 $10.97 $11.30
INCOME FROM INVESTMENT OPERATIONS
Net investment income .61 .67 .65 .66 .23
Net realized and unrealized gain
(loss) on investment transactions .06 .01 (.25) .66 (.32)
TOTAL FROM INVESTMENT OPERATIONS .67 .68 .40 1.32 (.09)
- ----------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment income (.61) (.67) (.65) (.66) (.23)
Distributions in excess of net
investment income -- (.02) (.02) -- (.01)
TOTAL DISTRIBUTIONS (.61) (.69) (.67) (.66) (.24)
NET ASSET VALUE, END OF PERIOD $11.41 $11.35 $11.36 $11.63 $10.97
TOTAL RETURN/2/ 6.03% 6.13% 3.64% 12.40% (0.68)%
- ----------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $1,507 $1,314 $1,396 $1,050 $371
Average net assets (000) $1,351 $1,329 $1,270 $667 $192
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees 1.46% 1.59% 1.51% 1.47% 1.90%/3/
Expenses, excluding distribution
fees .71% .84% .76% .72% 1.15%/3/
Net investment income 5.36% 5.87% 5.73% 5.92% 5.30%/3/
Portfolio turnover 301% 180% 170% 160% 123%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period 8-1-94, when Class C shares were first
offered, through 12-31-94.
2 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods of less than a full year is not
annualized.
3 Annualized.

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- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------

CLASS Z SHARES
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the period from December 16, 1996 through December 31, 1996 were
audited by other independent auditors, whose reports were unqualified.

<TABLE>
<CAPTION>
CLASS Z SHARES (FISCAL YEARS ENDED 12-31)
- --------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996/1/
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.35 $11.37 $11.41
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .69 .77 .09
Net realized and unrealized gain (loss)
on investment transactions .07 .02 (.02)
TOTAL FROM INVESTMENT OPERATIONS (.76) .79 .07
- --------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.69) (.77) (.09)
Distributions in excess of net investment income -- (.04) (.02)
TOTAL DISTRIBUTIONS (.69) (.81) (.11)
NET ASSET VALUE, END OF PERIOD $11.42 $11.35 $11.37
TOTAL RETURN/2/ 6.92% 7.01% .59%
- --------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996
<S> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $4,614 $784 $200/4/
Average net assets (000) $1,748 $313 $200/4/
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees .71% .84% .76%/3/
Expenses, excluding distribution fees .71% .84% .76%/3/
Net investment income 6.03% 6.71% 6.48%/3/
Portfolio turnover 301% 180% 170%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period 12-16-96, when Class Z shares were first
offered, through 12-31-96.
2 Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and sold on
the last day of each period reported. Total return for periods of less than a
full year is not annualized.
3 Annualized.
4 Figures are actual and not rounded to the nearest thousand.

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<PAGE>

- --------------------------------------------------------------------------------
The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------

Prudential offers a broad range of mutual funds designed to meet your
individual needs. For information about these funds, contact your financial
adviser or call us at (800) 225-1852. Please read the prospectus carefully
before you invest or send money.

STOCK FUNDS
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential 20/20 Focus Fund
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund

ASSET ALLOCATION/BALANCED FUNDS
Prudential Balanced Fund
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund

GLOBAL FUNDS
GLOBAL STOCK FUNDS
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Index Series Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
Global Utility Fund, Inc.

GLOBAL BOND FUNDS
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Global Total Return Fund, Inc.

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<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

BOND FUNDS
TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Structured Maturity Fund, Inc.
Income Portfolio

TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.

MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.

TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series

COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund

INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series

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FOR MORE INFORMATION
________________________________________________________________

Please read this prospectus before you invest in the Fund and keep it for
future reference. For information or shareholder questions contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------------------------------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- --------------------------------------------------------------------------------
Visit Prudential's Web Site At:
HTTP://WWW.PRUDENTIAL.COM
- --------------------------------------------------------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:

STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)

ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance)

SEMI-ANNUAL REPORT

You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:

By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)

In Person:
Public Reference Room in Washington, DC
(For hours of operation, call 1(800) SEC-0330)

Via the Internet:
http://www.sec.gov
- --------------------------------------------------------------------------------
CUSIP NUMBERS:
CLASS A: 743924-10-2
CLASS B: 743924-20-1
CLASS C: 743924-30-0
CLASS Z: 743924-70-6

Investment Company Act File No:
811-5594

Printed on Recycled Paper
[RECYCLE LOGO APPEARS HERE]

MF140A
<PAGE>

PRUDENTIAL STRUCTURED MATURITY FUND, INC.

Statement of Additional Information
dated March 1, 1999

Prudential Structured Maturity Fund, Inc. (the Company), is an open-end,
management investment company comprised of two Portfolios--the Income
Portfolio and the Municipal Income Portfolio. Only the Income Portfolio (the
Fund) is offered at this time. The investment objective of the Fund is high
current income consistent with the preservation of principal. The Fund seeks
to achieve its objective primarily through structuring its portfolio by
utilizing a "laddered" maturity strategy. The Fund invests primarily in
investment grade corporate debt securities and in obligations of the U.S.
Government, its agencies and instrumentalities with maturities of six years or
less. The Fund may also invest up to 10% of its total assets in securities
rated below BBB by Standard & Poor's Ratings Group or Baa by Moody's Investors
Service (or a similar nationally recognized statistical rating organization),
or, if not rated, of comparable quality in the opinion of the investment
adviser. The securities in which the Fund invests are allocated by maturity
among six annual maturity categories ranging from one year or less to between
five and six years with each category representing approximately one-sixth of
the Fund's assets. As the securities in each annual category mature or as new
investments are made in the Fund, the proceeds will be invested to maintain
the balance of investments among the six annual maturity categories. There can
be no assurance that the Fund's investment objective will be achieved. See
"Description of the Fund, Its Investments and Risks."

The Company's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of the Fund, dated March 1, 1999, a
copy of which may be obtained from the Company upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund History.............................................................. B-2
Description of the Fund, Its Investments and Risks........................ B-2
Investment Restrictions................................................... B-17
Management of the Company................................................. B-19
Control Persons and Principal Holders of Securities....................... B-23
Investment Advisory and Other Services.................................... B-23
Brokerage Allocation and Other Practices.................................. B-27
Capital Shares, Other Securities and Organization......................... B-28
Purchase, Redemption and Pricing of Fund Shares........................... B-29
Shareholder Investment Account............................................ B-40
Net Asset Value........................................................... B-45
Taxes, Dividends and Distributions........................................ B-46
Performance Information................................................... B-48
Financial Statements...................................................... B-51
Independent Accountants Report............................................ B-62
Appendix I--Description of Security Ratings............................... I-1
Appendix II--General Investment Information............................... II-1
Appendix III--Historical Performance Data................................. III-1
Appendix IV--Information Relating to Prudential........................... IV-1
</TABLE>
- -------------------------------------------------------------------------------
MF140B
<PAGE>

FUND HISTORY

The Company was incorporated in Maryland on June 8, 1988. The Company
initially offered only one series known as Prudential Structured Maturity
Fund. On July 15, 1993, the Board of Directors authorized the creation of the
Municipal Income Portfolio and approved the designation of the existing shares
of the Company as shares of the Income Portfolio. At a special meeting held on
July 19, 1994, shareholders approved an amendment to the Company's Articles of
Incorporation to change the Company name from Prudential-Bache Structured
Maturity Fund, Inc. to Prudential Structured Maturity Fund, Inc.

DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS

(A) CLASSIFICATION. The Fund is a diversified, open-end management
investment company.

(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS. The investment
objective of the Fund is high current income consistent with the preservation
of principal. While the principal investment policies and strategies for
seeking to achieve this objective are described in the Fund's Prospectus, the
Fund may from time to time also use the securities, instruments, policies and
strategies described below in seeking to achieve its objective. The Fund may
not be successful in achieving its objective and you could lose money.

U.S. Government Securities

U.S. TREASURY SECURITIES. The Fund will invest in U.S. Treasury securities,
including bills, notes and bonds. These instruments are direct obligations of
the U.S. Government and, as such, are backed by the full faith and credit of
the United States. They differ in their interest rates and the lengths of
their maturities.

SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund will invest in obligations issued or guaranteed by
agencies of the U.S. Government or instrumentalities established or sponsored
by the U.S. Government. These obligations, including those which are
guaranteed by federal agencies or instrumentalities, may or may not be backed
by the full faith and credit of the United States. Obligations of the
Government National Mortgage Association (GNMA), the Farmers Home
Administration and the Export-Import Bank are backed by the full faith and
credit of the United States. In the case of securities not backed by the full
faith and credit of the United States, the Fund must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment and may
not be able to assert a claim against the United States if the agency or
instrumentality does not meet its commitments. Securities of this type in
which the Fund may invest that are not backed by the full faith and credit of
the United States include obligations which generally may be satisfied only by
the individual credit of the issuing agency, such as obligations of the
Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage
Corporation (FHLMC) and the Resolution Funding Corporation. GNMA, FNMA and
FHLMC investments may include collateralized mortgage obligations.

MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The U.S. Government or the issuing agency or
instrumentality guarantees the payment of interest on and principal of these
securities; however, the guarantees do not extend to the yield or value of the
securities nor do the guarantees extend to the yield or value of the Fund's
shares. Mortgages backing the securities purchased by the Fund include
conventional thirty-year fixed-rate mortgages, graduated payment mortgages,
fifteen-year mortgages, adjustable rate mortgages and balloon payment
mortgages. A balloon payment mortgage-backed security is an amortizing
mortgage security with installments of principal and interest, the last
installment of which is predominantly principal. All of these mortgages can be
used to create pass-through securities. A pass-through security is formed when
mortgages are pooled together and undivided interests in the pool or pools are
sold. The cash flow from the mortgages is passed through to the holders of the
securities in the form of periodic payments of interest, principal and
prepayments (net of a service fee). Prepayments occur when the holder of an
undivided mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity would
indicate. The remaining expected average life of a pool of mortgage loans
underlying a mortgage-backed security is a prediction of when the mortgage
loans will be repaid and is based upon a variety of factors, such as the
demographic and geographic characteristics of the borrowers and the mortgaged
properties, the length of time that each of the mortgage loans has been
outstanding, the interest rates payable on the mortgage loans and the current
interest rate environment. Because mortgage-backed securities are often
prepaid, a pass-through security with a stated remaining maturity of more than
its remaining expected average life will be deemed by the Fund, for purposes

B-2
<PAGE>

of determining the Fund's effective dollar-weighted average maturity, to have
a remaining maturity equal to its remaining expected average life. The
determination of the remaining expected average life of mortgage-backed
securities will be made by the investment adviser, subject to the supervision
of the Company's Board of Directors. In selecting investments for the Fund and
in determining the remaining maturity, the investment adviser will rely on
average remaining life data published by various mortgage-backed securities
dealers except to the extent such data are deemed unreasonable by the
investment adviser. The investment adviser might deem such data unreasonable
if such data appeared to present a significantly different average remaining
expected life for a security when compared to data relating to the average
remaining life of comparable securities as provided by other independent
mortgage-backed securities dealers.

During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Fund reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at that
time. Therefore, the Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium generally will result in capital
losses.

GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities which evidence
an undivided interest in a pool of mortgage loans. GNMA Certificates differ
from bonds in that principal is paid back monthly by the borrower over the
term of the loan rather than returned in a lump sum at maturity. GNMA
Certificates that the Fund purchases are the modified pass-through type.
Modified pass-through GNMA Certificates entitle the holder to receive a share
of all interest and principal prepayments paid and owed on the mortgage pool,
net of fees paid to the issuer and GNMA, regardless of whether or not the
mortgagor actually makes the payment. The GNMA Certificates will represent a
pro rata interest in one or more pools of the following types of mortgage
loans: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate graduated
payment mortgage loans; (iii) fixed-rate growing equity mortgage loans; (iv)
fixed-rate mortgage loans secured by manufactured (mobile) homes; (v) mortgage
loans on multi-family residential properties under construction; (vi) mortgage
loans on completed multi-family projects; (vii) fixed-rate mortgage loans as
to which escrowed funds are used to reduce the borrower's monthly payments
during the early years of the mortgage loans (buydown mortgage loans); (viii)
mortgage loans that provide for adjustments in payments based on periodic
changes in interest rates or in other payment terms of the mortgage loans; and
(ix) mortgage-backed serial notes. All of these mortgage loans will be FHA
Loans or VA Loans and, except as otherwise specified above, will be fully-
amortizing loans secured by first liens on one-to-four family housing units.

GNMA GUARANTEE. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act, as amended (the Housing Act), authorizes GNMA to
guarantee the timely payment of principal and interest on certificates that
are based on and backed by a pool of mortgages insured by the Federal Housing
Administration under the Housing Act, or Title V of the Housing Act of 1949
(FHA loans), or guaranteed by the Veterans Administration under the
Servicemen's Retirement Act of 1944, as amended (VA loans), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith
and credit of the U.S. Government is pledged to the payment of all amounts
that may be required to be paid under the guarantee. In order to meet its
obligations under such guarantee, GNMA is authorized to borrow from the U.S.
Treasury with no limitations as to amount.

FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation was created in
1970 through enactment of Title III of the Emergency Home Finance Act of 1970.
Its purpose is to promote development of a nationwide secondary market in
conventional residential mortgages.

The FHLMC presently issues two types of mortgage pass-through securities,
mortgage participation certificates (PCs) and guaranteed mortgage
certificates. The Fund does not intend to invest in guaranteed mortgage
certificates. PCs resemble GNMA Certificates in that each PC represents a pro
rata share of all interest and principal payments made and owed on the
underlying pool. The FHLMC guarantees timely monthly payment of interest on
PCs and the stated principal amount.

FNMA SECURITIES. The Federal National Mortgage Association was established
in 1938 to create a secondary market in mortgages. FNMA issues guaranteed
mortgage pass-through certificates (FNMA Certificates). FNMA Certificates
resemble GNMA Certificates in that each FNMA Certificate represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. FNMA guarantees timely payment of interest on FNMA Certificates and the
stated principal amount.

B-3
<PAGE>

ADJUSTABLE RATE MORTGAGE SECURITIES. Generally, adjustable rate mortgage
securities (ARMs) have a specified maturity date and amortize principal over
their life. In periods of declining interest rates, there is a reasonable
likelihood that ARMs will experience increased rates of prepayment of
principal. However, the major difference between ARMs and fixed-rate mortgage
securities (FRMs) is that the interest rate and the rate of amortization of
principal of ARMs can and do change in accordance with movements in a
particular, pre-specified, published interest rate index. The amount of
interest on an ARM is calculated by adding a specified amount, the "margin,"
to the index, subject to limitations on the maximum and minimum interest that
is charged during the life of the mortgage or to maximum and minimum changes
to that interest rate during a given period. Because the interest rate on ARMs
generally moves in the same direction as market interest rates, the market
value of ARMs tends to be more stable than that of long-term fixed-rate
securities. The Fund expects this characteristic to contribute to its
objective of preservation of principal.

The interest rates paid on the ARMs in which the Fund invests generally are
readjusted at intervals of one year or less to an increment over some
predetermined interest rate index. There are two main categories of indices:
those based on U.S. Treasury securities and those derived from a calculated
measure such as a cost of funds index or a moving average of mortgage rates.
Commonly utilized indices include the one-year and five-year constant maturity
Treasury Note rates, the three-month Treasury Bill rate, the 180-day Treasury
Bill rate, rates on longer-term Treasury securities, the 11th District Federal
Home Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month
or three-month London Interbank Offered Rate (LIBOR), the prime rate of a
specific bank, or commercial paper rates. Some indices, such as the one-year
constant maturity Treasury Note rate, closely mirror changes in market
interest rate levels. Others, such as the 11th District Home Loan Bank Cost of
Funds index (often related to ARMs issued by FNMA), tend to lag behind changes
in market rate levels and tend to be somewhat less volatile.

The underlying mortgages which collateralize the ARMs in which the Fund
invests will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes
in the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.

FIXED-RATE MORTGAGE SECURITIES. The Fund anticipates investing in high-
coupon fixed-rate mortgage securities. Such securities are collateralized by
fixed-rate mortgages and tend to have high prepayment rates when the level of
prevailing interest rates declines significantly below the interest rates on
the mortgages. Thus, under those circumstances, the securities are generally
less sensitive to interest rate movements than lower coupon FRMs.

STRIPS. The Fund may invest in component parts of U.S. Government
Securities, namely, either the corpus (principal) of such obligations or one
of the interest payments scheduled to be paid on such obligations. These
obligations may take the form of (i) obligations from which the interest
coupons have been stripped, (ii) the interest coupons that are stripped, (iii)
book entries at a Federal Reserve member bank representing ownership of
obligation components or (iv) receipts evidencing the component parts (corpus
or coupons) of U.S. Government obligations that have not actually been
stripped. Such receipts evidence ownership of component parts of U.S.
Government obligations (corpus or coupons) purchased by a third party
(typically an investment banking firm) and held on behalf of the third party
in physical or book-entry form by a major commercial bank or trust company
pursuant to a custody agreement with the third party. U.S. Government
obligations, including those underlying such receipts, are backed by the full
faith and credit of the U.S. Government.

The Fund may also invest in mortgage pass-through securities where all
interest payments go to one class of holders (Interest Only Securities or IOs)
and all principal payments go to a second class of holders (Principal Only
Securities or POs). These securities are commonly referred to as mortgage-
backed securities strips or MBS strips.

The yields to maturity on IOs are very sensitive to the rate of principal
payments (including prepayments) on the related underlying assets, and a rapid
rate of principal payments may have a material adverse effect on the yield to
maturity. If the underlying assets experience greater than anticipated
prepayments of principal, the Fund may not fully recoup its initial investment
in these securities. Conversely, if the underlying assets experience less than
anticipated prepayments of principal, the yield on POs could be materially
adversely affected.

B-4
<PAGE>

Corporate and Other Debt Obligations

The Fund may invest in debt securities of U.S. issuers that have securities
outstanding that are rated at the time of purchase at least BBB by Standard &
Poor's Ratings Group (S&P) or Baa by Moody's Investors Service (Moody's) or
comparably rated by a similar nationally recognized statistical rating
organization (NRSRO) or, if not rated, of comparable quality in the opinion of
the investment adviser. The Fund may also invest up to 10% of total assets in
securities rated BB or Ba by S&P or Moody's, respectively (or comparably rated
by a similar NRSRO), or, if not rated, of comparable quality in the opinion of
the investment adviser (junk bonds). Securities rated Baa by Moody's are
considered to be investment grade, although they have speculative
characteristics. Changes in economic or other circumstances are more likely to
lead to a weakened capacity of issuers whose securities are rated BBB or Baa
to pay interest or repay principal than is the case for issuers of higher
rated securities. Securities rated below Baa by Moody's and below BBB by S&P
are considered speculative and are commonly referred to as junk bonds. Such
securities generally offer a higher yield than those in the higher rated
categories but also involve greater risk of loss of principal and income and
may also be subject to greater price volatility due to the market's
perceptions of the creditworthiness of the issuer.

The corporate obligations in which the Fund may invest include mortgage-
backed securities, including collateralized mortgage obligations and real
estate mortgage investment conduits, and asset-backed securities. The Fund may
invest up to 30% of its net assets in collateralized mortgage obligations and
real estate mortgage investment conduits and up to 25% of its net assets in
asset-backed securities.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. Fixed-income
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligations (credit risk) and may also be subject
to price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity
(market risk). Lower rated or unrated (i.e., high yield) securities, commonly
referred to as "junk bonds", are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
react primarily to movements in the general level of interest rates. The
investment adviser considers both credit risk and market risk in making
investment decisions for the Fund. Investors should carefully consider the
relative risks of investing in high yield securities and understand that such
securities are not generally meant for short-term investing.

Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. During an economic downturn or recession,
securities of highly leveraged issuers are more likely to default than
securities of higher rated issuers. In addition, the secondary market for high
yield securities, which is concentrated in relatively few market makers, may
not be as liquid as the secondary market for more highly rated securities.
Under adverse market or economic conditions, the secondary market for high
yield securities could contract further, independent of any specific adverse
changes in the condition of a particular issuer. As a result, the investment
adviser could find it more difficult to sell these securities or may be able
to sell the securities only at prices lower than if such securities were
widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Fund's value (NAV). The responsibility of the
Company's Board of Directors to value the securities becomes more difficult
and judgment plays a greater role in valuation because there is less reliable,
objective data available. Moreover, under the circumstances where the Fund
owns the majority of an issue, market and credit risks may be greater.

Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting
in a decline in the overall credit quality of the Fund's portfolio and
increasing the exposure of the Fund to the risks of high yield securities.

Ratings of fixed income securities represent the rating agencies' opinions
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be
better or worse than a rating indicates.

Federal laws require the divestiture by federally insured savings and loan
associations of their investments in high yield bonds and limit the
deductibility of interest by certain corporate issuers of high yield bonds.
These laws could also adversely

B-5
<PAGE>

affect the Fund's NAV and investment practices, the secondary market for high
yield securities, the financial condition of issuers of these securities and
the value of outstanding high yield securities.

Mortgage-Backed and Asset-Backed Securities

MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property. There are currently
three basic types of mortgage-backed securities: (i) those issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities,
such as GNMA, FNMA and FHLMC, described under "U.S. Government Securities"
above; (ii) those issued by private issuers that represent an interest in or
are collateralized by mortgage-backed securities issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities; and (iii) those
issued by private issuers that represent an interest in or are collateralized
by whole mortgage loans or mortgage-backed securities without a U.S.
Government guarantee but usually having some form of private credit
enhancement.

The Fund intends to invest in non-agency whole loan mortgage-backed
securities rated at least AA by S&P or Aa by Moody's.

Private mortgage pass-through securities are structured similarly to the
GNMA, FNMA and FHLMC mortgage pass-through securities and are issued by
originators of and investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose
subsidiaries of the foregoing. These securities usually are backed by a pool
of conventional fixed-rate or adjustable rate mortgage loans. Since private
mortgage pass-through securities typically are not guaranteed by an entity
having the credit status of GNMA, FNMA and FHLMC, such securities generally
are structured with one or more types of credit enhancement.

COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND REAL ESTATE MORTGAGE
INVESTMENT CONDUITS (REMICS). A CMO is a debt security that is backed by a
portfolio of mortgages or mortgage-backed securities. The issuer's obligation
to make interest and principal payments is secured by the underlying portfolio
of mortgages or mortgage-backed securities. Typically, CMOs are collateralized
by GNMA, FNMA or FHLMC certificates, but also may be collateralized by whole
loans or private mortgage pass-through securities (such collateral is
collectively referred to as Mortgage Assets). Multi-class pass-through
securities are equity interests in a trust composed of Mortgage Assets.
Payments of principal and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multi-class pass-through securities.
CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including
depository institutions, mortgage banks, investment banks and special purpose
subsidiaries of the foregoing. The issuer of a series of CMOs may elect to be
treated as a REMIC. All future references to CMOs include REMICs.

In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a tranche, is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal and interest on the
Mortgage Assets may be allocated among the several classes of a CMO series in
a number of different ways. Generally, the purpose of the allocation of the
cash flow of a CMO to the various classes is to obtain a more predictable cash
flow to the individual tranches than exists with the underlying collateral of
the CMO. As a general rule, the more predictable the cash flow is on a CMO
tranche, the lower the anticipated yield will be on that tranche at the time
of issuance relative to prevailing market yields on mortgage-backed
securities.

Certain issuers of CMOs, including certain CMOs that have elected to be
treated as REMICs, are not considered investment companies pursuant to a rule
adopted by the Securities and Exchange Commission (Commission), and the Fund
may invest in the securities of such issuers without the limitations imposed
by the Investment Company Act of 1940, as amended (the Investment Company Act)
on investments by the Fund in other investment companies. In addition, in
reliance on an earlier Commission interpretation, the Fund's investments in
certain other qualifying CMOs, which cannot or do not rely on the rule, are
also not subject to the limitation of the Investment Company Act on acquiring
interests in other investment companies. In order to be able to rely on the
Commission's interpretation, these CMOs must be unmanaged, fixed asset
issuers, that (a) invest primarily in mortgage-backed securities, (b) do not
issue redeemable securities, (c) operate under general exemptive orders
exempting them from all provisions of the Investment Company Act, and (d) are
not

B-6
<PAGE>

registered or regulated under the Investment Company Act as investment
companies. To the extent that the Fund selects CMOs or REMICs that cannot rely
on the rule or do not meet the above requirements, the Fund may not invest
more than 10% of its assets in all such entities and may not acquire more than
3% of the voting securities of any single such entity.

The underlying mortgages which collateralize the CMOs and REMICs in which
the Fund invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or
down (1) per reset or adjustment interval and (2) over the life of the loan.
Some residential mortgage loans restrict periodic adjustments by limiting
changes in the borrower's monthly principal and interest payments rather than
limiting interest rate changes. These payment caps may result in negative
amortization.

STRIPPED MORTGAGE-BACKED SECURITIES (PRIVATELY ISSUED). In addition to MBS
strips issued by agencies or instrumentalities of the U.S. Government, the
Fund may purchase MBS strips issued by private originators of, or investors
in, mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing.

ASSET-BACKED SECURITIES. Through the use of trusts and special purpose
corporations, various types of assets, primarily home equity loans and
automobile and credit card receivables, are being securitized in pass-through
structures similar to the mortgage pass-through structures described above or
in a pay-through structure similar to the collateralized mortgage structure.
The Fund may invest in these and other types of privately-issued asset-backed
securities which may be developed in the future. Asset-backed securities
present certain risks that are not presented by mortgage-backed securities.
Primarily, these securities do not have the benefit of the same security
interest in the related collateral. Credit card receivables are generally
unsecured and debtors are entitled to the protection of a number of state and
federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, the security interests in
the underlying automobiles are often not transferred when the pool is created,
with the resulting possibility that the collateral could be resold. The
remaining maturity of an asset-backed security will be deemed to be equal to
the average maturity of the assets underlying such security determined by the
investment adviser on the basis of assumed prepayment rates and other factors
with respect to such assets. In general, these types of loans are of shorter
duration than mortgage loans and are less likely to have substantial
prepayments.

RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. Mortgage-backed securities, including those issued or guaranteed
privately or by the U.S. Government or one of its agencies or
instrumentalities, and asset-backed securities differ from traditional debt
securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and principal may be
prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if the Fund purchases such
a security at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Alternatively,
if the Fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce,
yield to maturity. The Fund may invest a portion of its assets in derivative
mortgage-backed securities such as MBS strips which are highly sensitive to
changes in prepayment and interest rates. The investment adviser will seek to
manage these risks (and potential benefits) by diversifying its investments in
such securities and through hedging techniques.

In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are subject to a higher risk of default than are other types of
mortgage-backed securities. See "U.S. Government Securities" above. The
investment adviser will seek to minimize this risk by investing in mortgage-
backed securities rated at least A by Moody's and S&P.

Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates
and decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Fund are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested
at lower interest rates than during a period of rising interest rates. Asset-
backed securities, although less likely to experience the same prepayment rate
as mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors may
predominate. Mortgage-backed securities and asset-backed securities generally
decrease in value as a result of increases in interest rates and usually have
less potential for capital appreciation during periods of declining interest
rates than other fixed-income securities with comparable maturities because of
the risk of prepayment. In addition, to the extent such

B-7
<PAGE>

mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments generally will result in some loss of the
holders' principal to the extent of the premium paid. On the other hand, if
such mortgage securities are purchased at a discount, an unscheduled
prepayment of principal will increase current and total returns and will
accelerate the recognition of income which when distributed to shareholders
will be taxable as ordinary income.

During periods of rising interest rates, the rate of prepayment of mortgages
underlying mortgage-backed securities can be expected to decline, extending
the projected average maturity of the mortgage-backed securities. The maturity
extension risk may effectively change a security which was considered short-
or intermediate-term at the time of purchase into a long-term security. Long-
term securities generally fluctuate more widely in response to changes in
interest rates than short- or intermediate-term securities.

Asset-backed securities involve certain risks that are not posed by
mortgage-backed securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest
in the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit card laws, some of which may reduce the ability to
obtain full payment. In the case of automobile receivables, due to various
legal and economic factors, proceeds from repossessed collateral may not
always be sufficient to support payments on these securities.

When-Issued and Delayed Delivery Securities

The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place a month or more in the future in order to secure what is considered to
be an advantageous price and yield to the Fund at the time of entering into
the transaction. The Fund will maintain in a segregated account cash or other
liquid assets having a value equal to or greater than the Fund's purchase
commitments. The securities so purchased are subject to market fluctuation and
no interest accrues to the purchaser during the period between purchase and
settlement. At the time of delivery of the securities the value may be more or
less than the purchase price and an increase in the percentage of the Fund's
assets committed to the purchase of securities on a when-issued or delayed
delivery basis may increase the volatility of the Fund's NAV.

Repurchase Agreements

The Fund may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money
is invested in the repurchase agreement. The Fund's repurchase agreements will
at all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily, and if the value
of instruments declines, the Fund will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Fund may incur a loss.

The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Company's Board of
Directors. The Fund's investment adviser will monitor the creditworthiness of
such parties, under the general supervision of the Board of Directors. In the
event of a default or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral. To the extent that the proceeds from any sale of
such collateral upon a default in the obligation to repurchase are less than
the repurchase price, the Fund will suffer a loss.

The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM)
pursuant to an order of the Commission. On a daily basis, any uninvested cash
balances of the Fund may be aggregated with those of such investment companies
and invested in one or more repurchase agreements. Each fund participates in
the income earned or accrued in the joint account based on the percentage of
its investment.

Money Market Instruments

The Fund may invest in high quality money market instruments, including:

1. Obligations denominated in U.S. dollars (including certificates of
deposit, bankers' acceptances and time deposits) of commercial banks, savings
banks and savings and loan associations having, at the time of acquisition by
the Fund of

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<PAGE>

such obligations, total assets of not less than $1 billion or its equivalent.
The Fund may invest in obligations of domestic banks, foreign banks, and
branches and offices thereof. The term "certificates of deposit" includes both
Eurodollar certificates of deposit, for which there is generally a market, and
Eurodollar time deposits, for which there is generally not a market.
Eurodollars are U.S. dollars deposited in banks outside the United States. For
this purpose, the certificates of deposit may have terms in excess of one
year.

2. Commercial paper, variable amount demand master notes, bills, notes and
other obligations issued by a U.S. company, a foreign company or a foreign
government, its agencies, instrumentalities or political subdivisions,
maturing in one year or less, denominated in U.S. dollars, and, at the date of
investment, rated at least A-2 by S&P or Prime-2 by Moody's, or, if not rated,
issued by an entity having an outstanding unsecured debt issue rated at least
A or A-2 by S&P or A or Prime-2 by Moody's. If such obligations are guaranteed
or supported by a letter of credit issued by a bank, the bank (including a
foreign bank) must meet the requirements set forth in paragraph 1 above. If
such obligations are guaranteed or insured by an insurance company or other
non-bank entity, the insurance company or other non-bank entity must represent
a credit of high quality, as determined by the Company's Board of Directors.
Under the Investment Company Act, a guaranty is not deemed to be a security of
the guarantor for purposes of satisfying the diversification requirements
provided that the securities issued or guaranteed by the guarantor and held by
the Fund do not exceed 10% of the Fund's total assets.

Yankee Obligations

The Fund may invest in U.S. dollar-denominated debt securities of foreign
corporations issued in the United States and U.S. dollar-denominated debt
securities issued or guaranteed as to payment of principal and interest by
governments, quasi-governmental entities, government agencies, supranational
entities and other governmental entities of foreign countries, which
securities are issued in the United States (Yankee obligations). A
supranational entity is an entity constituted by the national governments of
several countries to promote economic development, such as the World Bank
(International Bank for Reconstruction and Development), the European
Investment Bank and the Asian Development Bank. Debt securities of quasi-
governmental entities are issued by entities owned by either a national, state
or equivalent government or are obligations of a political unit that is not
backed by the national government's full faith and credit and general taxing
powers. These include, among others, the Province of Ontario and the City of
Tokyo.

Investments in obligations of foreign issuers may be subject to certain
risks, including future political and economic developments, the possible
imposition of withholding taxes on interest income, the seizure or
nationalization of foreign deposits and foreign exchange controls or other
restrictions. In addition, there may be less publicly available information
about a foreign issuer than about a domestic issuer and such entities may not
be subject to the same accounting, auditing and financial recordkeeping
standards and requirements as domestic issuers. In the event of a default with
respect to any foreign debt obligations, it may be more difficult for the Fund
to obtain or enforce a judgment against the issuer of such securities.

Lending of Securities

Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 30% of the value of the
Fund's total assets and that the loans are callable at any time by the Fund.
As a matter of fundamental policy, the Fund will not lend more than 30% of the
value of its total assets. The loans must at all times be secured by cash or
other liquid assets or secured by an irrevocable letter of credit in favor of
the Fund in an amount equal to at least 100%, determined daily, of the market
value of the loaned securities. The collateral is segregated pursuant to
applicable regulations. During the time portfolio securities are on loan, the
borrower will pay the Fund an amount equivalent to any dividend or interest
paid on such securities and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower. The advantage of such loans is that the Fund continues to
receive payments in lieu of the interest and dividends on the loaned
securities, while at the same time earning interest either directly from the
borrower or on the collateral, which will be invested in short-term
obligations.

A loan may be terminated by the borrower on one business day's notice or by
the Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower

B-9
<PAGE>

of the securities fail financially. However, these loans of portfolio
securities will be made only to firms determined to be creditworthy pursuant
to procedures approved by the Board of Directors of the Company. On
termination of the loan, the borrower is required to return the securities to
the Fund, and any gain or loss in the market price during the loan would inure
to the Fund.

Since voting or consent rights, if any, which accompany loaned securities
pass to the borrower, the Fund will follow the policy of calling the loan, in
whole or in part as may be appropriate, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment
in the securities which are the subject of the loan. The Fund will pay
reasonable finders', administrative and custodial fees in connection with a
loan of its securities or may share the interest earned on collateral with the
borrower.

Covered Dollar Rolls

The Fund may enter into covered dollar rolls. In a dollar roll, the Fund
sells securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type and coupon)
securities on a specified future date from the same party. During the roll
period, the Fund foregoes principal and interest paid on the securities. The
Fund is compensated by the difference between the current sale price and the
forward price for the future purchase (often referred to as the drop) as well
as by the interest earned on the cash proceeds of the initial sale. A covered
roll is a specific type of dollar roll for which there is an offsetting cash
position or a cash equivalent security position which matures on or before the
forward settlement date of the dollar roll transaction.

The Fund will establish a segregated account in which it will maintain cash
or other liquid assets having a value equal to its obligations in respect of
covered dollar rolls. Covered dollar rolls involve the risk that the market
value of the securities retained by the Fund may decline below the price of
the securities the Fund has sold but is obligated to repurchase under the
agreement. In the event the buyer of securities under a covered dollar roll
files for bankruptcy or becomes insolvent, the Fund's use of the proceeds of
the agreement may be restricted pending a determination by the other party, or
its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities.

The Fund may invest up to 5% of its total assets in covered dollar rolls.

World Bank Obligations

The Fund may purchase obligations of the International Bank for
Reconstruction and Development (the World Bank). Obligations of the World Bank
are supported by appropriated but unpaid commitments of its member countries,
including the U.S., and there is no assurance these commitments will be
undertaken or met in the future.

Instruments with Puts

The Fund may purchase instruments together with the right to resell the
instruments at an agreed-upon price or yield within a specified period prior
to the maturity date of the instruments. Such a right to resell is commonly
known as a put, and the aggregate price which the Fund pays for instruments
with puts may be higher than the price which otherwise would be paid for the
instruments. Consistent with the Fund's investment objective and applicable
rules issued by the Commission and subject to the supervision of the Board of
Directors, the purpose of this practice with respect to money market
instruments is to permit the Fund to be fully invested while preserving the
necessary liquidity to meet unusually large redemptions and to purchase at a
later date securities other than those subject to the put. Puts may be
exercised prior to the expiration date in order to fund obligations to
purchase other securities or to meet redemption requests. These obligations
may arise during periods in which proceeds from sales of portfolio shares and
from recent sales of portfolio securities are insufficient to meet such
obligations or when the funds available are otherwise allocated for
investment. In addition, puts may be exercised prior to the expiration date in
the event the investment adviser revises its evaluation of the
creditworthiness of the issuer of the underlying security. In determining
whether to exercise puts prior to their expiration date and in selecting which
puts to exercise in such circumstances, the investment adviser considers,
among other things, the amount of cash available to the Fund, the expiration
dates of the available puts, any future commitments for securities purchases,
the yield, quality and maturity dates of the underlying securities,
alternative investment opportunities and the desirability of retaining the
underlying securities in the Fund. When the put is at the option of the Fund,
the Fund considers the maturity of an instrument subject to the put to be the
earlier of the put expiration date or the stated maturity of the instrument.

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<PAGE>

Since the value of the put is dependent on the ability of the put writer to
meet its obligation to repurchase, the Fund's policy is to enter into put
transactions only with such brokers, dealers or financial institutions or
original issuers which present minimal credit risks. There is a credit risk
associated with the purchase of puts in that the broker, dealer or financial
institution or original issuer might default on its obligation to repurchase
an underlying security. In the event such a default should occur, the Fund is
unable to predict whether all or any portion of any loss sustained could
subsequently be recovered from the broker, dealer or financial institution or
original issuer.

Illiquid Securities

The Fund may hold up to 15% of its net assets in illiquid securities,
including agreements which have a maturity of longer than seven days, certain
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.

Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities that have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market (Direct Placement Securities). Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the
marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.

In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which
the unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may
not be indicative of the liquidity of such investments.

Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a safe harbor from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial
paper and foreign securities will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers,
such as PORTAL System sponsored by the National Association of Securities
Dealers, Inc. (NASD). The Fund's investment in Rule 144A securities could have
the effect of increasing illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing Rule 144A
securities.

Restricted securities, including securities eligible for resale pursuant to
Rule 144A under the Securities Act, and commercial paper that have a readily
available market are treated as liquid only when deemed liquid under
procedures established by the Directors. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser
will consider, inter alia, the following factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers wishing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the
security and the nature of the marketplace trades (for example, the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). In addition, in order for commercial paper that is
issued in reliance on Section 4(2) of the Securities Act to be considered
liquid, (i) it must be rated in one of the two highest rating categories by at
least two nationally recognized statistical rating organizations (NRSRO), or
if only one NRSRO rates the securities, by that NRSRO, or, if unrated, be a
comparable quality in the view of the investment adviser; and (ii) it must not
be traded flat (that is, without accrued interest) or in default as to
principal or interest. Repurchase agreements subject to demand are deemed to
have a maturity equal to the notice period.

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<PAGE>

When the Fund enters into interest rate swaps on other than a net basis, the
entire amount of the Fund's obligations, if any, with respect to such interest
rate swaps will be treated as illiquid. To the extent that the Fund enters
into interest rate swaps on a net basis, the net amount of the excess, if any,
of the Fund's obligations over its entitlements with respect to each interest
rate swap will be treated as illiquid.

The staff of the Commission has taken the position that purchased over-the-
counter options and the assets used as "cover" for written over-the-counter
options are illiquid securities unless the Fund and the counterparty have
provided for the Fund, at the Fund's election, to unwind the over-the-counter
option. The exercise of such an option ordinarily would involve the payment by
the Fund of an amount designed to reflect the counterparty's economic loss
from an early termination, but does allow the Fund to treat the assets used as
cover as liquid.

Borrowing

The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes. The Fund may pledge up to 20% of its
total assets to secure these borrowings. The Fund will not purchase portfolio
securities if its borrowings exceed 5% of its net assets.

Hedging and Return Enhancement Strategies

The Fund may also engage in various portfolio strategies, including
utilizing derivatives, to reduce certain risks of its investments and to
attempt to enhance return, but not for speculation. The Company, and thus the
investor, may lose money through any unsuccessful use of these strategies.
These strategies include the use of interest rate swap transactions and
Eurodollar futures contracts and options thereon. The Fund's ability to use
these strategies may be limited by market conditions, regulatory limits and
there can be no assurance that any of these strategies will succeed.

OPTIONS TRANSACTIONS. The Fund reserves the right to enter into options
transactions but has no intention of doing so in the foreseeable future.

INTEREST RATE SWAP TRANSACTIONS. The Fund may enter into interest rate
swaps. Interest rate swaps involve the exchange by the Fund with another party
of their respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions as a hedge and not as a
speculative investment.

The risk of loss with respect to interest rate swaps is limited to the net
amount of interest payments that the Fund is contractually obligated to make
and will not exceed 5% of the Fund's net assets. The use of interest rate
swaps may involve investment techniques and risks different from those
associated with ordinary portfolio transactions. If the investment adviser is
incorrect in its forecast of market values, interest rates and other
applicable factors, the investment performance of the Fund would diminish
compared to what it would have been if the investment technique was never
used.

The Fund may enter into interest rate swap transactions on either an asset-
based or liability-based basis, depending on whether it is hedging its assets
or its liabilities. Under normal circumstances, the Fund will enter into
interest rate swaps on a net basis, that is, the two payment streams are
netted out, with the Fund receiving or paying, as the case may be, only the
net amount of the two payments. The net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate
swap will be accrued on a daily basis and an amount of cash or other liquid
assets having an aggregate NAV at least equal to the accrued excess will be
maintained in a segregated account. To the extent that the Fund enters into
interest rate swaps on other than a net basis, the amount maintained in a
segregated account will be the full amount of the Fund's obligations, if any,
with respect to such interest rate swaps, accrued on a daily basis. Inasmuch
as segregated accounts are established for these hedging transactions, the
investment adviser and the Fund believe such obligations do not constitute
senior securities. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreement
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms. Since
interest rate swaps are individually negotiated, the Fund expects to achieve
an acceptable degree of correlation between its rights to receive interest on
its portfolio securities and its rights and obligations to receive and pay
interest pursuant to interest rate swaps. The Fund will enter into interest
rate swaps only with parties meeting creditworthiness standards approved by
the Company's Board of Directors. The investment adviser will monitor the
creditworthiness of such parties under the supervision of the Board of
Directors.

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<PAGE>

INTEREST RATE FUTURES CONTRACTS. The Fund may purchase and sell futures
contracts and options thereon for certain hedging and risk management purposes
and to attempt to enhance return in accordance with regulations of the
Commodity Futures Trading Commission. The Fund, and thus its investors, may
lose money through any unsuccessful use of these strategies. As a purchaser of
an interest rate futures contract (futures contract), the Fund incurs an
obligation to take delivery of a specified amount of the obligation underlying
the futures contract at a specified time in the future for a specified price.
As a seller of a futures contract, the Fund incurs an obligation to deliver
the specified amount of the underlying obligation at a specified time in
return for an agreed upon price.

The Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the investment adviser anticipates that interest
rates may rise and, concomitantly, the price of U.S. Government or other debt
securities falls, the Fund may sell a futures contract. If declining interest
rates are anticipated, the Fund may purchase a futures contract to protect
against a potential increase in the price of U.S. Government or other debt
securities the Fund intends to purchase. Subsequently, appropriate U.S.
Government or other debt securities may be purchased by the Fund in an orderly
fashion; as securities are purchased, corresponding futures positions would be
terminated by offsetting sales of contracts. In addition, futures contracts
will be bought or sold in order to close out a short or long position in a
corresponding futures contract.

Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed
out by effecting a futures contract purchase for the same aggregate amount of
the specific type of security and the same delivery date. If the sale price
exceeds the offsetting purchase price, the seller would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same aggregate amount of the specific type of security
and the same delivery date. If the offsetting sale price exceeds the purchase
price, the purchaser would realize a gain, whereas if the purchase price
exceeds the offsetting sale price, the purchaser would realize a loss. There
is no assurance that the Fund will be able to enter into a closing
transaction.

When the Fund enters into a futures contract it is initially required to
deposit in a segregated account performing the transaction, an initial margin
of cash or liquid assets equal to approximately 2-3% of the contract amount.
Initial margin requirements are established by the exchanges on which futures
contracts trade and may, from time to time, change. In addition, brokers may
establish margin deposit requirements in excess of those required by the
exchanges.

Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a broker's client but is, rather, a good faith deposit on the
futures contract which will be returned to the Fund upon the proper
termination of the futures contract. The margin deposits made are marked to
market daily and the Fund may be required to make subsequent deposits into the
segregated account, maintained for that purpose,
or cash or liquid assets, called variation margin, in the name of the broker,
which are reflective of price fluctuations in the futures contract. Currently,
interest rate futures contracts can be purchased on debt securities such as
U.S. Treasury Bills, Notes and Bonds, Eurodollar instruments, GNMA
Certificates and bank certificates of deposit.

The Fund may purchase Eurodollar futures and options thereon, which are
essentially U.S. dollar-denominated futures contracts or options linked to
LIBOR. Eurodollar futures contracts are currently traded on the Chicago
Mercantile Exchange. They enable purchasers to obtain a fixed-rate for the
lending of funds and sellers to obtain a fixed-rate for borrowings. The Fund
would use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rates swaps are linked.

OPTIONS ON FUTURES CONTRACTS. The Fund may purchase call and put options on
futures contracts which are traded on an exchange and enter into closing
transactions with respect to such options to terminate an existing position.
An option on a futures contract gives the purchaser the right (in return for
the premium paid), and the writer the obligation, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified exercise price at any time during the
term of the option. Upon exercise of the option, the assumption of offsetting
futures positions by the writer and the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of the
futures contract at the time of exercise exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option on the
futures contract.

B-13
<PAGE>

The Fund will purchase options on futures contracts for identical purposes
to those set forth above for the purchase of a futures contract (purchase of a
call option or sale of a put option) and the sale of a futures contract
(purchase of a put option or sale of a call option), or to close out a long or
short position in futures contracts. If, for example, the investment adviser
wished to protect against an increase in interest rates and the resulting
negative impact on the value of a portion of its U.S. Government securities
portfolio, it might purchase a put option on an interest rate futures
contract, the underlying security of which correlates with the portion of the
portfolio the investment adviser seeks to hedge.

LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. Under regulations
of the Commodity Exchange Act, investment companies registered under the
Investment Company Act are exempt from the definition of commodity pool
operator, subject to compliance with certain conditions. The exemption is
conditioned upon the Fund's purchasing and selling futures contracts and
options thereon for bona fide hedging transactions, except that the Fund may
purchase and sell futures contracts and options thereon for any other purpose
to the extent that the aggregate initial margin and option premiums do not
exceed 5% of the liquidation value of the Fund's total assets. The Fund will
use futures contracts and options thereon in a manner consistent with these
requirements.

RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES. Participation in the
options or futures markets involves investment risks and transaction costs to
which the Fund would not be subject absent the use of these strategies. The
Fund, and thus its investors, may lose money through the unsuccessful use of
these strategies. If the investment adviser's predictions of movements in the
direction of the securities and interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than
if such strategies were not used. Risks inherent in the use of options and
futures contracts and options on futures contracts include (1) dependence on
the investment adviser's ability to predict correctly movements in the
direction of interest rates and securities prices; (2) imperfect correlation
between the price of options and futures contracts and options thereon and
movement sin the prices of the securities or currencies being hedged; (3) the
fact that skills needed to use these strategies are different from those
needed to select portfolio securities; (4) the possible absence of a liquid
secondary market for any particular instrument at any time, and (5) the
possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need
for the Fund to sell a portfolio security at a disadvantageous time, due to
the need for the Fund to maintain cover or to segregate securities in
connection with hedging transactions.

The Fund may sell a futures contract to protect against the decline in the
value of securities held by the Fund. However, it is possible that the futures
market may advance and the value of securities held in the Fund's portfolio
may decline. If this were to occur, the Fund would lose money on the futures
contracts and also experience a decline in value in its portfolio securities.
However, while this could occur for a very brief period or to a very small
degree, over time the market prices of the securities of a diversified
portfolio will tend to move in the same direction as the prices of futures
contracts.

If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by
a reduction in the price of the securities.

There is a risk that the prices of securities subject to futures contracts
(and thereby the futures contract prices) may correlate imperfectly with the
behavior of the cash prices of the Fund's portfolio securities. Another such
risk is that prices of futures contracts may not move in tandem with the
changes in prevailing interest rates against which the Fund seeks a hedge. A
correlation may also be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between
a contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity.

There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities (or currencies) which are the subject of the hedge. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities (or currencies) and futures
market could result. Price distortions could also result if investors in
futures contracts elect to make or take delivery of underlying securities (or
currencies) rather than engage in closing transactions due to the resultant
reduction in the liquidity of the futures market. In addition, due to the fact
that, from the point of view of speculators, the deposit requirements in the
futures markets are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures markets could

B-14
<PAGE>

cause temporary price distortions. Due to the possibility of price distortions
in the futures market and because of the imperfect correlation between
movements in the prices of securities (or currencies) and movements in the
prices of futures contracts, a correct forecast of interest rate trends by the
investment adviser may still not result in a successful hedging transaction.

The risk of imperfect correlation increases as the composition of the Fund's
securities portfolio diverges from the securities that are the subject of the
futures contract, for example, those included in the municipal index. Because
the change in the price of the futures contract may be more or less than the
change in prices of the underlying securities, even a correct forecast of
interest rate changes may not result in a successful hedging transaction.

Pursuant to the requirements of the Commodity Exchange Act, all futures
contracts and options thereon must be traded on an exchange. The Fund intends
to purchase and sell futures contracts only on exchanges where there appears
to be a market in such futures sufficiently active to accommodate the volume
of its trading activity. The Fund's ability to establish and close out
positions in futures contracts and options on futures contracts would be
impacted by the liquidity of these exchanges. Although the Fund generally
would purchase or sell only those futures contracts and options thereon for
which there appeared to be a liquid market, there is no assurance that a
liquid market on an exchange will exist for any particular futures contract or
option at any particular time. In the event no liquid market exists for a
particular futures contract or option thereon in which the Fund maintains a
position, it would not be possible to effect a closing transaction in that
contract or to do so at a satisfactory price and the Fund would have to either
make or take delivery under the futures contract or, in the case of a written
call option, wait to sell the underlying securities until the option expired
or was exercised, or, in the case of a purchased option, exercise the option
and comply with the margin requirements for the underlying futures contract to
realize any profit. In the case of a futures contract or an option on a
futures contract which the Fund had written and which the Fund was unable to
close, the Fund would be required to maintain margin deposits on the futures
contract or option and to make variation margin payments until the contract is
closed. In the event futures contracts have been sold to hedge portfolio
securities, such securities will not be sold until the offsetting futures
contracts can be executed. Similarly, in the event futures have been bought to
hedge anticipated securities purchases, such purchases will not be executed
until the offsetting futures contracts can be sold.

Exchanges on which futures and related options trade may impose limits on
the positions that the Fund may take in certain circumstances. In addition,
the hours of trading of financial futures contracts and options thereon may
not conform to the hours during which the Fund may trade the underlying
securities. To the extent the futures markets close before the securities
markets, significant price and rate movements can take place in the securities
markets that cannot be reflected in the futures markets.

As described above, under regulations of the Commodity Exchange Act,
investment companies registered under the Investment Company Act are exempt
from the definition of commodity pool operator, subject to compliance with
certain conditions. The Fund may enter into futures or related options
contracts for return enhancement purposes if the aggregate initial margin and
option premiums do not exceed 5% of the liquidation value of the Fund's total
assets, after taking into account unrealized profits and unrealized losses on
any such contracts, provided, however, that in the case of an option that is
in-the-money, the in-the-money amount may be excluded in computing such 5%.
The above restriction does not apply to the purchase and sale of futures and
related options contracts for bone fide hedging purchases within the meaning
of the regulations of the CFTC.

In order to determine that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either:
(1) a substantial majority (that is, approximately 75%) of all anticipatory
hedge transactions (transactions in which the Fund does not own at the time of
the transaction, but expects to acquire, the securities underlying the
relevant futures contract) involving the purchase of futures contracts will be
completed by the purchase of securities which are the subject of the hedge, or
(2) the underlying value of all long positions in futures contracts will not
exceed the total value of (a) all short-term debt obligations held by the
Fund; (b) cash held by the Fund; (c) cash proceeds due to the Fund on
investments within thirty days; (d) the margin deposited on the contracts; and
(e) any unrealized appreciation in the value of the contracts.

B-15
<PAGE>

If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account, cash or liquid assets equal
in value (when added to any initial or variation margin on deposit) to the
market value of the securities underlying the futures contract. Such a
position may also be covered by owning the securities underlying the futures
contract, or by holding a call option permitting the Fund to purchase the same
contract at a price no higher than the price at which the short position was
established.

In addition, if the Fund holds a long position in a futures contract, it
will hold cash or liquid assets equal to the purchase price of the contract
(less the amount of initial or variation margin on deposit) in a segregated
account. Alternatively, the Fund could cover its long position by purchasing a
put option on the same futures contract with an exercise price as high or
higher than the price of the contract held by the Fund.

Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then
it may prove impossible to liquidate a futures position until the daily limit
moves have ceased. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin on
open futures positions. In such situations, if the Fund has insufficient cash,
it may be disadvantageous to do so. In addition, the Fund may be required to
take or make delivery of the instruments underlying futures contracts it holds
at a time when it is disadvantageous to do so. The ability to close out
options and futures positions could also have an adverse impact on the Fund's
ability to hedge effectively its portfolio.

In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or paret of its margin deposits with the
broker. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the investment adviser.

RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. Compared to the
purchase or sale of futures contracts, the purchase and sale of call or put
options on futures contracts involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the Fund
notwithstanding that the purchase or sale of a futures contract would not
result in a loss, as in the instance where there is no movement in the prices
of the futures contracts or underlying securities.

An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. As described above,
although the Fund generally will purchase only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option, or at
any particular time, and for some options, no secondary market on an exchange
may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that the Fund would have
to exercise its options in order to realize any profit and would incur
transaction costs upon the sale of underlying securities pursuant to the
exercise of put options.

Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (3) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (4) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (5) the
facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (6) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange could continue to be
exercisable in accordance with their terms.

There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.

B-16
<PAGE>

The Fund will limit its use of futures contracts and options thereon to the
purchase of Eurodollar futures contracts and options thereon linked to LIBOR.

Segregated Assets

When the Fund is required to segregate assets in connection with certain
hedging transactions, it will segregate cash or liquid assets. "Liquid assets"
means cash, U.S. Government securities, equity securities (including foreign
securities), debt obligations or other liquid, unencumbered assets, marked-to-
market daily. Such hedging transactions may involve when-issued and delayed
delivery securities, futures contracts, written options and options on future
contracts (unless otherwise covered). If collateralized or otherwise covered,
in accordance with Commission guidelines, these will not be deemed to be
senior securities.

(D) TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS

During periods when the investment adviser deems it necessary for temporary
defensive purposes, the Fund may invest without limit in high quality money
market instruments and repurchase agreements. The Fund may also invest in high
quality money market instruments and repurchase agreements to provide
liquidity. The Fund will also apply the proceeds of new investments in the
Fund to purchase money market instruments and repurchase agreements until
these amounts can be used to purchase corporate and other debt obligations and
U.S. Government securities with laddered maturities of from one year or less
to six years. The yield on money market instruments and repurchase agreements
is generally lower than the yield on corporate and other debt obligations and
U.S. Government securities. Accordingly, the Fund's yield and total return
will generally be lower during these periods.

(E) PORTFOLIO TURNOVER

The Fund does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 200%. High
portfolio turnover may involve correspondingly greater transaction costs,
which will be borne by the Fund. The portfolio turnover rate is calculated by
dividing the lesser of sales or purchases of portfolio securities by the
average monthly value of the portfolio securities, excluding securities having
a maturity at the date of purchase of one year or less. The Fund's turnover
rates in 1998 and 1997 were 301% and 180%, respectively. In response to
volatile market conditions in the second half of 1998, the subadviser adjusted
the Fund's exposure to corporate bonds to take advantage of opportunities in
the market place. As a result, the Fund's portfolio turnover rate for the
fiscal year ended December 31, 1998 was relatively high.

INVESTMENT RESTRICTIONS

The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the outstanding voting securities of the Fund. A "majority of the
outstanding voting securities" of the Fund, when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting
shares are present in person or represented by proxy or (ii) more than 50% of
the outstanding voting shares.

The Fund may not:

1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or variation margin in
connection with options or futures contracts is not considered the purchase of
a security on margin.

2. Make short sales of securities or maintain a short position, except short
sales "against the box".

3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions and may pledge up to 20% of the
value of its total assets to secure such borrowings. The purchase or sale of
securities on a "when-issued" or delayed delivery basis, and the purchase and
sale of financial futures contracts and collateral arrangements with respect
thereto and with respect to interest rate swap transactions, covered dollar
rolls and reverse repurchase agreements, are not deemed to be a pledge of
assets and such arrangements are not deemed to be the issuance of a senior
security. The Fund will not purchase portfolio securities if its borrowings
exceed 5% of its net assets.

4. Purchase any security (other than obligations of the U.S. Government, its
agencies and instrumentalities including municipal obligations and obligations
guaranteed as to principal and interest) if as a result: (i) with respect to
75% of its net

B-17
<PAGE>

assets, more than 5% of the Fund's total assets (determined at the time of
investment) would then be invested in securities of a single issuer or (ii)
25% or more of the Fund's total assets (determined at the time of investment)
would be invested in one or more issuers having their principal business
activities in the same industry.

5. Purchase securities, other than obligations of the U.S. Government, its
agencies or instrumentalities, of any issuer having a record, together with
predecessors, of less than three years of continuous operations if,
immediately after such purchase, more than 5% of such Fund's total assets
would be invested in such securities.

6. Buy or sell real estate or interests in real estate, except that the Fund
may purchase and sell mortgage-backed securities, securities collateralized by
mortgages, securities which are secured by real estate, securities of
companies which invest or deal in real estate and publicly traded securities
of real estate investment trusts. The Fund may not purchase interests in real
estate limited partnerships which are not readily marketable.

7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.

8. Make investments for the purpose of exercising control or management.

9. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 10% of its total assets (determined at
the time of investment) would be invested in such securities, or except as
part of a merger, consolidation or other acquisition.

10. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.

11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (limited to 30% of the value of the Fund's total assets).

12. Purchase common stock or other voting securities, preferred stock,
warrants or other equity securities, except as may be permitted by restriction
number 9.

13. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon.

Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later
change in percentage resulting from changing total or net asset values will
not be considered a violation of such policy. However, in the event that the
Fund's asset coverage for borrowing falls below 300%, the Fund will take
prompt action to reduce its borrowings, as required by applicable law.

B-18
<PAGE>

MANAGEMENT OF THE COMPANY

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS** AND AGE THE FUND DURING PAST 5 YEARS
- ----------------------- ------------- ---------------------
<S> <C> <C>
Edward D. Beach (74) Director President and Director of BMC Fund, Inc., a
closed-end investment company; formerly Vice
Chairman of Broyhill Furniture Industries,
Inc.; Certified Public Accountant; Secretary
and Treasurer of Broyhill Family Foundation,
Inc.; Member of the Board of Trustees of Mars
Hill College; Director of The High Yield Income
Fund, Inc.
Eugene C. Dorsey (72) Director Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now Freedom
Forum); former Publisher of four Gannett
newspapers and Vice President of Gannett
Company; past Chairman of Independent Sector,
(national coalition of philanthropic
organizations); former Chairman of the American
Council for the Arts; Director of the Advisory
Board of Chase Manhattan Bank of Rochester, The
High Yield Income Fund, Inc. and First
Financial Fund, Inc.
Delayne Dedrick Gold (60) Director Marketing and Management Consultant; Director of
The High Yield Income Fund, Inc.
*Robert F. Gunia (52) Vice President Vice President (since September 1997) of The
and Director Prudential Insurance Company of America
(Prudential); Executive Vice President and
Treasurer (since December 1996), Prudential
Investments Fund Management LLC (PIFM); Senior
Vice President (since March 1987) of Prudential
Securities Incorporated (Prudential
Securities); formerly Chief Administrative
Officer (July 1990-September 1996), Director
(January 1989-September 1996) and Executive
Vice President, Treasurer and Chief Financial
Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc. (PMF);
Vice President and Director of The Asia Pacific
Fund, Inc. (since May 1989); Director of The
High Yield Income Fund, Inc.
*Mendel A. Melzer, Director Chief Investment Officer (since October 1996) of
CFA (38) Prudential Investments; formerly Chief
751 Broad Street Financial Officer (November 1995-September
Newark, NJ 07102-4077 1996) of Prudential Investments; Senior Vice
President and Chief Financial Officer (April
1993-November 1995) of Prudential Preferred
Financial Services, Managing Director (April
1991-April 1993) of Prudential Investment
Advisors, and Senior Vice President (July 1989-
April 1991) of Prudential Capital Corporation;
Chairman and Director of Prudential Series
Fund, Inc.; Director of The High Yield Income
Fund, Inc.
</TABLE>

B-19
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS** AND AGE THE FUND DURING PAST 5 YEARS
- ----------------------- ------------- ---------------------
<S> <C> <C>
Thomas T. Mooney (57) Director President of Greater Rochester Metro Chamber of
Commerce; formerly Rochester City Manager;
Trustee of Center for Governmental Research,
Inc.; Director of Blue Cross of Rochester, The
Business Council of New York State; Executive
Service Corps of Rochester, Monroe County Water
Authority, Rochester Jobs, Inc., Monroe County
Industrial Development Corporation, Northeast
Midwest Institute and The High Yield Income
Fund, Inc.; President, Director and Treasurer
of First Financial Fund, Inc. and The High
Yield Plus Fund, Inc.
Thomas H. O'Brien (74) Director President of O'Brien Associates (financial and
management consultants) (since April 1984);
formerly President of Jamaica Water Securities
Corp. (holding company) (February 1989-August
1990), Chairman of the Board and Chief
Executive Officer (September 1987-February
1989) and Director (September 1987-April 1990)
of Jamaica Water Supply Company; Director and
President of Winthrop Regional Health Systems
and United Presbyterian Home at Syosset Inc.;
Director of Ridgewood Savings Bank and The High
Yield Income Fund, Inc.; Trustee of Hofstra
University.
Richard A. Redeker (55) Director Formerly President, Chief Executive Officer and
751 Broad Street Director (October 1993-September 1996),
Newark, NJ 07102-4077 Prudential Mutual Fund Management, Inc.,
Executive Vice President, formerly Director and
Member of Operating Committee (October 1993-
September 1996) of Prudential Securities,
Director (October 1993-September 1996) of
Prudential Securities Group, Inc., Executive
Vice President, The Prudential Investment
Corporation; Executive Vice President, The
Prudential Investment Corporation (January
1994-September 1996), Director (January 1994-
September 1996) of Prudential Mutual Fund
Distributors, Inc. and Prudential Mutual Fund
Services, Inc. and Senior Executive Vice
President and Director of Kemper Financial
Services, Inc. (September 1978-September 1993);
President and Director of The High Yield Income
Fund, Inc.
*Brian M. Storms (44) President President, Prudential Investments (October 1998-
and Director present); President of Prudential Mutual Funds,
Annuities, and Investment Management Services
(September 1996-October 1998); Managing
Director, Fidelity Investments Institutional
Services Company, Inc. (July 1991-September
1996); President, J.K. Schofield (October-1989-
September 1991); Senior Vice President, INVEST
Financial Corporation (September 1982-October
1989); President and Director or Trustee of
funds within the Prudential Mutual Funds
Complex.
</TABLE>

B-20
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS** AND AGE THE FUND DURING PAST 5 YEARS
- ----------------------- ------------- ---------------------
<S> <C> <C>
Nancy H. Teeters (68) Director Economist; formerly Vice President and Chief
Economist of International Business Machines
Corporation (March 1986-June 1990); Director of
Inland Steel Industries (since July 1991) and
The High Yield Income Fund, Inc.
Louis A. Weil, III (57) Director Chairman (since January 1999), President and
Chief Executive Officer (since January 1996)
and Director (since September 1991) of Central
Newspapers, Inc.; Chairman (since January
1996), Publisher and Chief Executive Officer
(August 1991-December 1995) of Phoenix
Newspapers, Inc.; formerly Publisher of Time
Magazine (May 1989-March 1991), President,
Publisher and Chief Executive Officer of The
Detroit News (February 1986-August 1989), and
member of the Advisory Board, Chase Manhattan
Bank-Westchester; Director of The High Yield
Income Fund, Inc.
Grace C. Torres (39) Treasurer and First Vice President (since December 1996) of
Principal PIFM; First Vice President (since March 1994)
Financial and of Prudential Securities; formerly First Vice
Accounting President (March 1994-September 1996) of
Officer Prudential Mutual Fund Management, Inc. and
Vice President (July 1989-March 1994) of
Bankers Trust Corporation.
Stephen M. Ungerman (45) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments and The Prudential Insurance
Company of America; formerly First Vice
President of Prudential Mutual Fund Management,
Inc. (February 1993-September 1996) and Senior
Tax Manager (1981-January 1993) of Price
Waterhouse LLP.
Deborah A. Docs (41) Secretary Vice President (since December 1996) of PIFM;
Vice President and Associate General Counsel of
Prudential Securities (since December 1996);
Vice President and Associate General Counsel
(June 1991-September 1996) of PMF.
David F. Connor (35) Assistant Assistant General Counsel (since March 1998) of
Secretary PIFM; Associate Attorney, Drinker Biddle &
Reath LLP prior thereto.
</TABLE>
- ----------
*"Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential Securities, Prudential or PIFM.
**Unless otherwise indicated, the address of the Directors and Officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.

The Company has Directors, who, in addition to overseeing the actions of the
Company's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Directors also review the actions of the Company's officers, who
conduct and supervise the daily business operations of the Fund.

Directors and officers of the Company are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Investment Management Services LLC.

The officers conduct and supervise the daily business operations of the
Company, while the Directors, in addition to their functions set forth under
"Management of the Company" and "Investment Advisory and Other Services,"
review such actions and decide on general policy.

B-21
<PAGE>

The Board of Directors has adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Messrs.
Beach, Dorsey and O'Brien are scheduled to retire on December 31, 1999.

Pursuant to the terms of the Management Agreement with the Company, the
Manager pays all compensation of officers and employees of the Company as well
as the fees and expenses of all Directors of the Company who are affiliated
persons of the Manager. The Company pays each of its Directors who is not an
affiliated person of PIFM or the investment adviser annual compensation of
$3,000, in addition to certain out-of-pocket expenses. The amount of annual
compensation paid to each Director may change as a result of the introduction
of additional funds on whose Boards the Directors may be asked to serve.

Directors may receive their Director's fee pursuant to a deferred fee
agreement with the Company. Under the terms of the agreement, the Fund accrues
daily the amount of such Director's fee which accrues interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills at
the beginning of each calendar quarter or, pursuant to a Commission exemptive
order, at the daily rate of return of the Fund. Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Director. The Fund's obligation to make payments of deferred Directors' fees,
together with interest thereon, is a general obligation of the Fund.

The following table sets forth the aggregate compensation paid by the
Company to the Directors who are not affiliated with the Manager for the
fiscal year ended December 31, 1998 and the aggregate compensation paid to
such Directors for service on the Company's Board and the boards of all other
investment companies managed by PIFM (Fund Complex) for the calendar year
ended December 31, 1998.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL 1998
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO DIRECTORS
- ----------------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Edward D. Beach--
Director............... $3,000 None N/A $135,000(44/71)*
Eugene C. Dorsey--
Director**............. $3,000 None N/A $ 70,000(17/46)*
Delayne Dedrick Gold--
Director............... $3,000 None N/A $135,000(44/71)*
Robert F. Gunia--
Director and Vice
President+............. -- -- -- --
Mendel A. Melzer, CFA--
Director+.............. -- -- -- --
Thomas T. Mooney--
Director**............. $3,000 None N/A $115,000(35/70)*
Thomas H. O'Brien--
Director............... $3,000 None N/A $ 45,000(12/30)*
Richard A. Redeker--
Director+.............. -- None N/A --
Brian Storms--Director
and President+......... -- -- -- --
Nancy H. Teeters--
Director............... $3,000 None N/A $ 90,000(26/47)*
Louis A. Weil, III--
Director............... $3,000 -- -- $ 90,000(30/54)*
</TABLE>
- --------
* Indicates number of funds/portfolios in Fund Complex to which aggregate
compensation relates.
** Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1998 includes amounts deferred at the
election of Directors under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $85,445, and
$119,740 for Messrs. Dorsey and Mooney, respectively.
+ Directors who are each interested do not receive compensation from the
Company or any other fund in the Fund Complex. Mr. Redeker is no longer an
interested Director.

B-22
<PAGE>

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

Directors of the Company are eligible to purchase Class Z shares of the
Fund, which are sold without either an initial sales charge or CDSC to a
limited group of investors.

As of February 5, 1999, the Directors and officers of the Company, as a
group, beneficially owned less than one percent of the outstanding shares of
common stock of the Fund.

As of February 5, 1999, Prudential Securities was record holder for other
beneficial owners of 3,745,646 Class A shares (50.9% of the outstanding Class
A shares), 3,709,433 Class B shares (92.4% of the outstanding Class B shares),
53,613 Class C shares (or 38.7% of the outstanding Class C shares) and 74,036
Class Z shares (18.7% of the outstanding Class Z shares) of the Fund. In the
event of any meetings of shareholders, Prudential Securities will forward, or
cause the forwarding of, proxy material to the beneficial owners for which it
is the record owner.

As of February 5, 1999, no shareholders owned beneficially, directly or
indirectly, 5% or more of the outstanding shares of the Fund.

INVESTMENT ADVISORY AND OTHER SERVICES

(A) MANAGER AND INVESTMENT ADVISER

The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Fund, comprise the Prudential Mutual Funds. See "How
the Fund is Managed--Manager" in the Prospectus. As of January 31, 1999, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $71.7 billion. According to the
Investment Company Institute, as of November 30, 1998, the Prudential Mutual
Funds were the 18th largest family of mutual funds in the United States.

PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly owned subsidiary of PIFM, serves as the transfer
agent for the Prudential Mutual Funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.

Pursuant to the Management Agreement with the Company (the Management
Agreement), PIFM, subject to the supervision of the Company's Board of
Directors and in conformity with the stated policies of the Fund, manages both
the investment operations of the Fund and the composition of the Fund's
portfolio, including the purchase, retention, disposition and loan of
securities. In connection therewith, PIFM is obligated to keep certain books
and records of the Company. PIFM also administers the Company's corporate
affairs and, in connection therewith, furnishes the Company with office
facilities, together with those ordinary clerical and bookkeeping services
which are not being furnished by State Street Bank and Trust Company, the
Company's custodian, and PMFS, the Company's transfer and dividend disbursing
agent. The management services of PIFM for the Company are not exclusive under
the terms of the Management Agreement and PIFM is free to, and does, render
management services to others.

For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .40 of 1% of the average daily net assets of the Fund.
The fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of
PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses
not incurred in the ordinary course of the Company's business) for any fiscal
year exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statutes or regulations of any jurisdiction in which
the Fund's shares are qualified for offer and sale, the compensation due to
PIFM will be reduced by the amount of such excess. No jurisdiction currently
limits the Fund's expenses.

PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and subsidies will increase the Fund's total return.

B-23
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In connection with its management of the corporate affairs of the Company,
PIFM bears the following expenses:

(a) the salaries and expenses of all of its and the Company's personnel
except the fees and expenses of Directors who are not affiliated persons of
PIFM or the Company's Subadviser;

(b) all expenses incurred by PIFM or by the Company in connection with
managing the ordinary course of the Company's business, other than those
assumed by the Company as described below; and

(c) the costs and expenses payable to The Prudential Investment Corporation,
doing business as Prudential Investments (PI or the Subadviser), pursuant to
the subadvisory agreement between PIFM and PI (the Subadvisory Agreement).

Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the
Manager or of the Company's Subadviser, (c) the fees and certain expenses of
the Custodian and Transfer and Dividend Disbursing Agent, including the cost
of providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Company, (e) brokerage commissions and any issue or transfer taxes chargeable
to the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of
any trade associations of which the Company may be a member, (h) the cost of
stock certificates representing shares of the Fund, (i) the cost of fidelity
and liability insurance, (j) certain organization expenses of the Fund and the
fees and expenses involved in registering and maintaining registration of the
Fund and of its shares with the Commission, including the preparation and
printing of the Company's registration statements and prospectuses for such
purposes, and paying the fees and expenses of notice filings made in
accordance with state securities laws (k) allocable communications expenses
with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Company's business and (m) distribution fees.

The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Company in connection with the
matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically
if assigned, and that it may be terminated without penalty by either party
upon not more than 60 days' nor less than 30 days' written notice. The
Management Agreement will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act. The Management Agreement was last approved by the Board of
Directors of the Company, including a majority of the Directors who are not
parties to the contract or interested persons of any such party as defined in
the Investment Company Act, on May 14, 1998 and by shareholders of the Fund on
April 25, 1990.

For the fiscal years ended December 31, 1998, 1997 and 1996, PIFM received
management fees of $533,582, $616,855 and $756,955, respectively, from the
Fund.

PIFM has entered into the Subadvisory Agreement with PI. The Subadvisory
Agreement provides that the Subadviser will furnish investment advisory
services in connection with the management of the Fund. In connection
therewith, PI is obligated to keep certain books and records of the Fund. PIFM
continues to have responsibility for all investment advisory services pursuant
to the Management Agreement and supervises PI's performance of such services.
PI is reimbursed by PIFM for the reasonable costs and expenses incurred by PI
in furnishing those services.

The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act
on May 14, 1998 and by shareholders of the Fund on April 25, 1990.

The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Company, PIFM or PI upon not more than 60 days', nor less
than 30 days', written notice. The Subadvisory Agreement provides that it will
continue in effect for a period of more than two years from its execution only
so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.

B-24
<PAGE>

(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS

Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Company. Prior to June 1, 1998,
Prudential Securities Incorporated (Prudential Securities) was the Company's
distributor. PIMS and Prudential Securities are subsidiaries of Prudential.

Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Company under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
also incurs the expenses of distributing the Fund's Class Z shares under the
Distribution Agreement, none of which are reimbursed by or paid for by the
Fund. See "How the Fund is Managed--Distributor" in the Prospectus.

The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or financial institutions
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of the Distributor associated with the sale of
Fund shares, including lease, utility, communications and sales promotion
expenses. The distribution and/or service fees may also be used by the
Distributor to compensate on a continuing basis brokers in consideration for
the distribution, marketing, administrative and other services and activities
provided by brokers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.

Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.

The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the
distribution, marketing, administrative and other services and activities
provided by brokers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.

CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an
annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. The Class A Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and/or the maintenance of shareholder accounts (service fee) and (2) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1%. The Distributor has contractually limited its distribution-related fees
payable under the Class A Plan to .25 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending December 31, 1999.

For the fiscal year ended December 31, 1998, the Distributor and Prudential
Securities collectively received payments of $73,382 on behalf of the Fund
under the Class A Plan and collectively spent approximately $73,382 in
distributing the Fund's Class A shares. This amount was primarily expended for
payments of account servicing fees to financial advisers and other persons who
sell Class A shares. For the fiscal year ended December 31, 1998, the
Distributor and Prudential Securities received approximately $25,800 on behalf
of the Fund in initial sales charges.

CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan
provides that (1) up to .25 of 1% of the average daily net assets of the Class
B shares may be paid as a service fee and (2) up to .75 of 1% (not including
the service fee) of the average daily net assets of the Class B shares (asset-
based sales charge) may be paid for distribution-related expenses with respect
to the Class B shares. The Class C Plan provides that (1) up to .25 of 1% of
the average daily net assets of the Class C shares may be paid as a service
fee and (2) up to .75 of 1% of the average daily net assets of the Class C
shares (asset-based sales charge) may be paid for distribution-related
expenses with respect to Class C shares. The service fee (.25 of 1% of average
daily net assets) is used to pay for personal service and/or the maintenance
of shareholder accounts. The Distributor also receives contingent deferred
sales charges from certain redeeming shareholders and, with respect to Class C
shares, an initial sales charge. The Distributor has contractually limited its
distribution fees with respect to Class B and Class C shares of the Fund to no
more than .75% of 1% of the average daily net assets of each of the Class B
and Class C shares for the fiscal year ending December 31, 1999.

B-25
<PAGE>

CLASS B PLAN. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities collectively received $426,851 from the Fund under
the Class B Plan and collectively spent approximately $123,100 in distributing
the Class B shares of the Fund. It is estimated that of the latter amount
approximately 1.9% ($2,300) was spent on printing and mailing of prospectuses
to other than current shareholders; 27.3%; ($33,600) was spent on compensation
to Pruco Securities Corporation, an affiliated broker-dealer (Prusec), for
commissions to its representatives and other expenses, including an allocation
on account of overhead and other branch office distribution-related expenses,
incurred by it for distribution of the Fund's shares; and 70.8% ($87,200) on
the aggregate of (i) payments of commissions and account servicing fees to
financial advisers (24.9% or $30,700) and (ii) an allocation on account of
overhead and other branch office distribution-related expenses (45.9% or
$56,500). The term "overhead and other branch office distribution-related
expenses" represents (a) the expenses of operating Prudential Securities
branch offices in connection with the sale of shares of the Fund, including
lease costs, the salaries and employee benefits of operations and sales
support personnel, utility costs, communications costs and the costs of
stationery and supplies, (b) the costs of client sales seminars, (c) expenses
of mutual fund sales coordinators to promote the sale of shares of the Fund,
and (d) other incidental expenses relating to branch promotion of Fund sales.

The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon
certain redemptions of Class B shares. For the fiscal year ended December 31,
1998, the Distributor and Prudential Securities collectively received
approximately $45,400 in contingent deferred sales charges attributable to
Class B shares.

CLASS C PLAN. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities collectively received $10,132 under the Class C Plan
and spent approximately $10,400 in distributing Class C shares. It is
estimated that of the latter amount, approximately 2.9% ($300) was spent on
printing and mailing of prospectuses to other than current shareholders; 97.1%
($10,100) was spent on the aggregate of (i) payments of commissions and
account servicing fees to financial advisers (75.9% or $7,900), and (ii) an
allocation of overhead and other branch office distribution-related expenses
(21.2% or $2,200).

The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon
certain redemptions of Class C shares. For the fiscal year ended December 31,
1998, the Distributor and Prudential Securities received approximately $800 in
contingent deferred sales charges attributable to Class C shares. For the
fiscal year ended December 31, 1999, the Distributor received approximately
$800 in initial sales charges with respect to Class C shares.

* * *

Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund are allocated to each such class based upon the ratio of
sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.

The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Directors who are not
interested persons of the Company and who have no direct or indirect financial
interest in the Class A, Class B or Class C Plan or in any agreement related
to the Plans (Rule 12b-1 Directors), cast in person at a meeting called for
the purpose of voting on such continuance. A Plan may be terminated at any
time, without penalty, by the vote of a majority of the Rule 12b-1 Directors
or by the vote of the holders of a majority of the outstanding shares of the
applicable class of the Fund on not more than 60 days', nor less than 30
days', written notice to any other party to the Plan. The Plans may not be
amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), and all material amendments are
required to be approved by the Board of Directors in the manner described
above. Each Plan will automatically terminate in the event of assignment. The
Company will not be contractually obligated to pay expenses incurred under any
Plan if it is terminated or not continued.

Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report includes an itemization
of the distribution expenses and the purposes of such expenditures. In
addition, as long as the Plans remain in effect, the selection and nomination
of Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.

B-26
<PAGE>

Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws.

In addition to distribution and service fees paid by the Company under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons which distribute shares of the Fund (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Subcustodians
provide custodial services for the Fund's foreign assets held outside the
United States.

Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the transfer and dividend disbursing agent of the
Fund. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $12.00
per shareholder account, a new account set-up fee of $2.00 for each manually
established shareholder account and a monthly inactive zero balance account
fee of $.20 per shareholder account. PMFS is also reimbursed for its out-of-
pocket expenses, including but not limited to postage, stationery, printing,
allocable communication expenses and other costs. For the fiscal year ended
December 31, 1998, the Fund incurred fees of approximately $186,000 for the
services of PMFS.

PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity
audits the Fund's annual financial statements.

BROKERAGE ALLOCATION AND OTHER PRACTICES

The Manager is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section,
the term "Manager" includes the Subadviser. The Fund does not normally incur
any brokerage commission expense on such transactions. The instruments
purchased by the Fund are generally traded on a "net" basis, with dealers
acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which
includes an amount of compensation to the underwriter, generally referred to
as the underwriter's concession or discount. On occasion, certain money market
instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. Portfolio securities may not be purchased
from any underwriting or selling syndicate of which Prudential Securities (or
any affiliate), during the existence of the syndicate, is a principal
underwriter (as defined in the Investment Company Act), except in accordance
with the rules of the Commission. This limitation, in the opinion of the
Company, will not significantly affect the Fund's ability to pursue its
present investment objective. However, in the future in other circumstances,
the Fund may be at a disadvantage because of this limitation in comparison to
other funds with similar objectives but not subject to such limitations.

In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price
and efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, that provide the most favorable
total cost or proceeds reasonably attainable under the circumstances. While
the Manager generally seeks reasonably competitive spreads or commissions, the
Fund will not necessarily be paying the lowest spread or commission available.
Within the framework of this policy, the Manager may consider research and
investment services provided by brokers or dealers who effect or are parties
to portfolio transactions of the Company, the Manager or the Manager's other
clients. Such research and investment services are those that brokerage houses
customarily provide to institutional investors and include statistical and
economic data and research reports on particular companies and industries.
Such services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the
execution of transactions for the Fund may be used in managing

B-27
<PAGE>

other investment accounts. Conversely, brokers furnishing such services may be
selected for the execution of transactions for such other accounts, whose
aggregate assets are far larger than the Fund's, and the services furnished by
such brokers may be used by the Manager in providing investment management for
the Fund. While such services are useful and important in supplementing its
own research and facilities, the Manager believes that the value of such
services is not determinable and does not significantly reduce expenses. The
Fund does not reduce the advisory fee it pays to the Manager by any amount
that may be attributed to the value of such services.

Subject to the above considerations, Prudential Securities may act as a
securities broker for the Fund. In order for Prudential Securities (or any
affiliate) to effect any portfolio transactions for the Fund, the commissions,
fees or other remuneration received by Prudential Securities (or any
affiliate) must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold during a
comparable period of time. This standard would allow Prudential Securities (or
any affiliate) to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-
length transaction. Furthermore, the Board of Directors of the Company,
including a majority of the non-interested Directors, has adopted procedures
which are reasonably designed to provide that any commissions, fees or other
remuneration paid to Prudential Securities (or any affiliate) are consistent
with the foregoing standard. Brokerage transactions with Prudential Securities
are also subject to such fiduciary standards as may be imposed by applicable
law. For the fiscal years ended December 31, 1998, 1997, and 1996, the Fund
paid no brokerage commissions.

The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company
Act) and their parents at December 31, 1998. As of December 31, 1998, the Fund
held securities of: (i) Bear Stearns & Co., Inc., in the aggregate amount of
$1,346,400; (ii) Deutsche Bank Securities Inc., in the aggregate amount of
$816,000; (iii) Goldman Sachs & Co., in the aggregate amount of $759,598; (iv)
Merrill Lynch & Co., Inc., in the aggregate amount of $3,045,000; (v) Morgan
(J.P.) Securities, Inc., in the aggregate amount of $1,346,400; and (vi)
Warburg Dillon Read LLC, in the aggregate amount of $1,346,400.

CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION

THE COMPANY WAS INCORPORATED IN MARYLAND ON JUNE 8, 1988. THE COMPANY IS
AUTHORIZED TO ISSUE 500 MILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER
SHARE, DIVIDED INTO FOUR CLASSES FOR EACH OF THE INCOME AND MUNICIPAL INCOME
PORTFOLIOS, DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS Z COMMON STOCK,
EACH OF WHICH CONSISTS OF 62,500,000 AUTHORIZED SHARES. Each class represents
an interest in the same assets of the Fund and is identical in all respects
except that (1) each class is subject to different sales charges and
distribution and/or service fees (except for Class Z shares, which are not
subject to any sales charges and distribution and/or service fees), which may
affect performance, (2) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (3) each
class has a different exchange privilege, (4) only Class B shares have a
conversion feature and (5) Class Z shares are offered exclusively for sale to
a limited group of investors. See "How the Fund is Managed--Distributor" in
the Prospectus. In accordance with the Company's Articles of Incorporation,
the Board of Directors may authorize the creation of additional series of
common stock and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Board of
Directors may determine.

The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Company, when
issued, are fully paid, nonassessable, fully transferable and redeemable at
the option of the holder. Shares are also redeemable at the option of the Fund
under certain circumstances. Each share of each class of common stock of the
Fund is equal as to earnings, assets and voting privileges, except as noted
above, and each class (with the exception of Class Z shares, which are not
subject to any distribution or service fees) bears the expenses related to the
distribution of its shares. Except for the conversion feature applicable to
the Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of common stock of the Fund is
entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares
generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders and to Class Z shareholders, whose shares are not
subject to any distribution and/or service fees. The Fund's shares do not have
cumulative voting rights for the election of Directors.

B-28
<PAGE>

The Company does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Company will not be required to hold meetings
of shareholders unless, for example, the election of Directors is required to
be acted on by shareholders under the Investment Company Act. Shareholders
have certain rights, including the right to call a meeting upon a vote of 10%
of the Company's outstanding shares for the purpose of voting on the removal
of one or more Directors or to transact any other business.

PURCHASE, REDEMPTION AND PRICING OF FUND SHARES

Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A or
Class C shares) or (2) on a deferred basis (Class B or Class C shares). Class
Z shares of the Fund are offered to a limited group of investors at NAV
without any sales charges. See "How to Buy, Sell and Exchange Shares of the
Fund" in the Prospectus.

PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free)
to receive an account number. The following information will be requested:
your name, address, tax identification number, class election, dividend
distribution election, amount being wired and wiring bank. Instructions should
then be given by you to your bank to transfer funds by wire to State Street
Bank and Trust Company (State Street), Boston, Massachusetts, Custody and
Shareholder Services Division, Attention: Prudential Structured Maturity
Fund--Income Portfolio, specifying on the wire the account number assigned by
PMFS and your name and identifying the class in which you are eligible to
invest (Class A, Class B, Class C or Class Z shares).

If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day.

In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Structured
Maturity Fund--Income Portfolio, Class A, Class B, Class C or Class Z shares
and your name and individual account number. It is not necessary to call PMFS
to make subsequent purchase orders utilizing Federal Funds. The minimum amount
which may be invested by wire is $1,000.

ISSUANCE OF FUND SHARES FOR SECURITIES

Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or
(3) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange
or market, and (d) are approved by the Fund's investment adviser.

B-29
<PAGE>

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
3.25%, Class C shares* are sold with a 1% sales charge, and Class B* and Class
Z shares are sold at NAV. Using the Fund's NAV at December 31, 1998, the
maximum offering price of the Fund's shares is as follows:

<TABLE>
<CAPTION>
Income
Portfolio
CLASS A ---------
<S> <C>
Net asset value and redemption price per Class A share......... $11.42
Maximum sales charge (3.25% of offering price)................. .38
------
Maximum offering price to public............................... $11.80
======
CLASS B
Net asset value, offering price and redemption price per Class
B share*...................................................... $11.41
======
CLASS C
Net asset value and redemption price per Class C share*........ $11.41
Sales Charge (1% of offering price)............................ .11
------
Offering price to public....................................... $11.52
======
CLASS Z
Net asset value, offering price and redemption price per Class
Z share....................................................... $11.42
======
</TABLE>
----------
* Class B and Class C shares are subject to a contingent deferred
sales charge on certain redemptions.
See "How to Buy, Sell and Exchange Shares of the Fund--How to Sell
Your Shares" in the Prospectus.

SELECTING A PURCHASE ALTERNATIVE

The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:

If you intend to hold your investment in the Fund for less than 2 years and
do not qualify for a reduced sales charge on Class A Shares, since Class A
shares are subject to a maximum initial sales charge of 3.25% and Class B
shares are subject to a CDSC of 3% which declines to zero over a 4 year
period, you should consider purchasing Class C shares over either Class A or
Class B shares.

If you intend to hold your investment for more than 2 years, but less than 3
years, you may consider purchasing Class B or Class C shares because: (1) the
contingent-deferred sales load plus the cumulative annual distribution-related
fee on Class B shares; and (2) the maximum 1% initial sales charge plus the
cumulative annual distribution-related fee on Class C shares would be lower
than the maximum 3.25% initial sales charge plus the cumulative annual
distribution-related fee on Class A shares. In addition, more of your money
would be invested initially in the case of Class C shares, because of the
relatively low initial sales charge, and all of your money would be invested
initially in the case of Class B shares, which are sold at NAV.

If you intend to hold your investment for more than 3 years, but less than 4
years, you may consider purchasing Class A shares because the maximum 3.25%
initial sales charge plus the cumulative annual distribution-related fee on
Class A shares would be lower than (1) the contingent-deferred sales charge
plus the cumulative annual distribution-related fee on Class B shares; and (2)
the maximum 1% initial sales charge plus the cumulative annual distribution-
related fee on Class C shares.

If you intend to hold your investment for more than 4 years, but less than 5
years, you may consider purchasing Class A or Class B shares because the
maximum 3.25% initial sales charge plus the cumulative annual distribution-
related fee on Class A shares and the cumulative annual distribution-related
fee on Class B shares would be less than the maximum 1% initial sales charge
plus the cumulative annual distribution-related fee on Class C shares.

If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual distribution-
related

B-30
<PAGE>

fee on Class A shares would be less than the cumulative annual distribution-
related fee on Class B shares and less than the initial sales charge plus the
cumulative annual distribution-related fee on Class C shares.

If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of
purchase.

If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than
3 years for the higher cumulative annual distribution-related fee on the Class
C shares plus the 1% initial sales charge to exceed the initial sales charge
plus cumulative annual distribution-related fees on Class A shares. This does
not take into account the time value of money, which further reduces the
impact of the higher Class C distribution-related fee on the investment,
fluctuations in NAV, the effect of the return on the investment over this
period of time or redemptions when the CDSC is applicable.

REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES

Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation or annuity plans under Sections 401(a), 403(b) and 457 of the
Internal Revenue Code, "rabbi" trusts and non-qualified deferred compensation
plans that are sponsored by any employer that has a tax qualified plan with
Prudential (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class A shares may be purchased at NAV by participants who are repaying loans
made from such plans to the participant.

Prudential Retirement Programs. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or non-
qualified under the Internal Revenue Code, for which Prudential provides
administrative or recordkeeping services, provided that (1) the plan has at
least $1 million in existing assets or 250 eligible employees and (2) the Fund
is an available investment option. These plans include pension, profit-
sharing, stock-bonus or other employee benefit plans under Section 401 of the
Internal Revenue Code, deferred compensation and annuity plans under Sections
457 and 403(b)(7) of the Internal Revenue Code and plans that participate in
the PruArray Program (benefit plan recordkeeping service) (hereafter referred
to as a PruArray Plan). All Benefit Plans of a company (or affiliated
companies under common control) for which Prudential serves as plan
administrator or recordkeeper are aggregated in meeting the $1 million
threshold, provided that Prudential has been notified in advance of the
entitlement to the waiver of the sales charge based on the aggregated assets.
The term "existing assets" as used herein includes stock issued by a plan
sponsor, shares of Prudential Mutual Funds and shares of certain unaffiliated
mutual funds that participate in the PruArray Plan (Participating Fund).
"Existing assets" also include monies invested in The Guaranteed Interest
Account (GIA), a group annuity insurance product issued by Prudential, the
Guaranteed Insulated Separate Account, a separate account offered by
Prudential and units of The Stable Value Fund (SVF), an unaffiliated bank
collective fund. Class A shares may also be purchased at NAV by plans that
have monies invested in GIA and SVF, provided (1) the purchase is made with
the proceeds of a redemption from either GIA or SVF and (2) Class A shares are
an investment option of the plan.

PruArray Association Benefit Plans. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are
members of a common trade, professional or membership association
(Association) that participate in the PruArray Plan provided that the
Association enters into a written agreement with Prudential. Such Benefit
Plans or non-qualified plans may purchase Class A shares at NAV without regard
to the assets or number of participants in the individual employer's qualified
Plan(s) or non-qualified plans so long as the employers in the Association (1)
have retirement plan assets in the aggregate of at least $1 million or 250
participants in the aggregate and (2) maintain their accounts with the
Transfer Agent.

B-31
<PAGE>

PruArray Savings Program. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for
purchase at NAV by Individual Retirement Accounts and Savings Accumulation
Plans of the company's employees. The Program is available only to (1)
employees who open an IRA or Savings Accumulation Plan account with the
Transfer Agent and (2) spouses of employees who open an IRA account with the
Transfer Agent. The program is offered to companies that have at least 250
eligible employees.

Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.

Other Waivers. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent, by:

. officers of the Prudential Mutual Funds (including the Company),

. employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer
Agent,

. employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer,

. Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries,

. registered representatives and employees of brokers who have entered
into a selected dealer agreement with the Distributor provided that
purchases at NAV are permitted by such person's employer,

. investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) the purchase is made with
proceeds of a redemption of shares of any open-end non-money market fund
sponsored by the financial adviser's previous employer (other than a
fund which imposes a distribution or service fee of .25 of 1% or less)
and (3) the financial adviser served as the client's broker on the
previous purchase,

. investors in Individual Retirement Accounts, provided the purchase is
made in a directed rollover to such Individual Retirement Account, or
with the proceeds of a tax-free rollover of assets from a Benefit Plan
for which Prudential provides administrative or recordkeeping services
and further provided that such purchase is made within 60 days of
receipt of the Benefit Plan distribution,

. orders placed by broker-dealers, investment advisers or financial
planners who have entered into an agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients and
who charge a management, consulting or other fee for their services (for
example, mutual fund "wrap" or asset allocation programs), and

. orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the
accounts are linked to the master account of such broker-dealer,
investment adviser or financial planner and the broker-dealer,
investment adviser or financial planner charges its clients a separate
fee for its services (for example, mutual fund "supermarket programs").

For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.

COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See "How to Buy, Sell and Exchange Shares of
the Fund--How to Buy Shares--Reducing or Waiving Class A's Initial Sales
Charge" in the Prospectus.

B-32
<PAGE>

An eligible group of related Fund investors includes any combination of the
following:

. an individual;

. the individual's spouse, their children and their parents;

. the individual's and spouse's Individual Retirement Account (IRA);

. any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will
be deemed to be controlled by each of its general partners);

. a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;

. a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and

. one or more employee benefit plans of a company controlled by an
individual.

In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).

The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the
investor's holdings. The Combined Purchase and Cumulative Purchase Privilege
does not apply to individual participants in any retirement or group plans.

RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of the
shares of the Fund and shares of other Prudential Mutual Funds (excluding
money market funds other than those acquired pursuant to the exchange
privilege) to determine the reduced sales charge. However, the value of shares
held directly with the Transfer Agent and through your broker will not be
aggregated to determine the reduced sales charge. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (NAV plus maximum sales charge) as of the
previous business day. The Distributor or the Transfer Agent must be notified
at the time of purchase that the investor is entitled to a reduced sales
charge. The reduced sales charges will be granted subject to confirmation of
the investor's holdings. Rights of Accumulation are not available to
individual participants in any retirement or group plans.

LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may
also qualify to purchase Class A shares at NAV by entering into a Letter of
Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).

For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent,
Prudential or its affiliates and through your broker will not be aggregated to
determine the value of the reduced sales charge.

A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number
of investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the
reduced sales charge applicable to the amount represented by the goal, as if
it were a single investment. In the case of a Participant Letter of Intent,
each investment made during the period will be made at net asset value.
Escrowed Class A shares totaling 5% of the dollar amount of the Letter of
Intent will be held by the Transfer Agent in the name of the purchaser, except
in the case of retirement and group plans

B-33
<PAGE>

where the employer or plan sponsor will be responsible for paying any
applicable sales charge. The effective date of an Investment Letter of Intent
(except in the case of retirement and group plans) may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of
Intent goal.

The Investment Letter of Intent does not obligate the investor to purchase,
nor the Company to sell, the indicated amount. Similarly, the Participant
Letter of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the
Letter of Intent goal is not achieved within the thirteen-month period, the
purchaser (or the employer or plan sponsor in the case of any retirement or
group plan) is required to pay the difference between the sales charge
otherwise applicable to the purchases made during this period and sales
charges actually paid. Such payment may be made directly to the Distributor
or, if not paid, the Distributor will liquidate sufficient escrowed shares to
obtain such difference. Investors electing to purchase Class A shares of the
Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.

The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or, in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to
individual participants in any retirement or group plans.

CLASS B SHARES

The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following
receipt of an order in proper form by the Transfer Agent, your broker or the
Distributor. Redemptions of Class B shares may be subject to a CDSC. See "Sale
of Shares--Contingent Deferred Sales Charges" below.

The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates
the ability of the Fund to sell the Class B shares without an initial sales
charge being deducted at the time of purchase. The Distributor anticipates
that it will recoup its advancement of sales commissions from the combination
of the CDSC and the distribution fee.

CLASS C SHARES

The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. Redemptions of Class C shares may be subject to a CDSC. See
"Sale of Shares--Contingent Deferred Sales Charges" below. In connection with
the sale of Class C shares, the Distributor will pay, from its own resources,
brokers, financial advisers and other persons which distribute Class C shares
a sales commission of up to 2% of the purchase price at the time of the sale.

WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES

Benefit Plans. Class C shares may be purchased at NAV, without payment of an
initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential, Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class C shares may be purchased at NAV by participants who are repaying the
loans made from such plans to the participant.

Prudential Retirement Plans. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified
retirement and deferred compensation plans participating in the PruArray Plan
and other plans for which Prudential provides administrative or recordkeeping
services.

Investment of Redemption Proceeds from Other Investment Companies. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered
investment company which were not held through an account with any Prudential
affiliate. Such purchases must be made

B-34
<PAGE>

within 60 days of the redemption. Investors eligible for this waiver include:
(1) investors purchasing shares through an account at Prudential Securities;
(2) investors purchasing shares through an ADVANTAGE Account or an Investor
Account with Prusec; and (3) investors purchasing shares through other
brokers. This waiver is not available to investors who purchase shares
directly from the Transfer Agent. You must notify the Transfer Agent directly
or through your broker if you are entitled to this waiver and provide the
Transfer Agent with such supporting documents as it may deem appropriate.

CLASS Z SHARES

Class Z shares of the Fund currently are available for purchase by the
following categories of investors:

. pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue
Code and non-qualified plans for which the Fund is an available option
(collectively, Benefit Plans), provided such Benefit Plans (in
combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution
assets;
. participants in any fee-based program or trust program sponsored by an
affiliate of the Distributor which includes mutual funds as investment
options and for which the Fund is an available option;
. certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by an affiliate of the Distributor for whom Class Z
shares of the Prudential Mutual Funds are an available investment
option;
. Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996,
(a) were Class Z shareholders of the Prudential Mutual Funds or (b)
executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds;
. current and former Directors/Trustees of the Prudential Mutual Funds
(including the Company);
. employees of Prudential and/or Prudential Securities who participate in
a Prudential-sponsored employee savings plan; and
. Prudential with an investment of $10 million or more.

After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares.

In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other
persons which distribute shares a finder's fee, from its own resources, based
on a percentage of the net asset value of shares sold by such persons.

SALE OF SHARES

You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charges"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for that day (that
is, 4:15 P.M., New York time) in order to receive that day's NAV. Your broker
will be responsible for furnishing all necessary documentation to the
Distributor and may charge you for its services in connection with redeeming
shares of the Fund.

If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your
Prudential Securities financial adviser.

If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence
of authority acceptable to the Transfer Agent must be submitted before such
request will be accepted. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your
broker.

B-35
<PAGE>

SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4)
are to be paid to a corporation, partnership, trust or fiduciary, the
signature(s) on the redemption request and on the certificates, if any, or
stock power must be guaranteed by an "eligible guarantor institution." An
"eligible guarantor institution" includes any bank, broker, dealer or credit
union. The Transfer Agent reserves the right to request additional information
from, and make reasonable inquiries of, any eligible guarantor institution.
For clients of Prusec, a signature guarantee may be obtained from the agency
or office manager of most Prudential Insurance and Financial Services or
Preferred Services offices. In the case of redemptions from a PruArray Plan,
if the proceeds of the redemption are invested in another investment option of
the plan in the name of the record holder and at the same address as reflected
in the Transfer Agent's records, a signature guarantee is not required.

Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times
(1) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (2) when trading on such Exchange is restricted, (3)
when an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(4) during any other period when the Commission, by order, so permits;
provided that applicable rules and regulations of the Commission shall govern
as to whether the conditions prescribed in (2), (3) or (4) exist.

Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has
been honored, which may take up to 10 calendar days from the time of receipt
of the purchase check by the Transfer Agent. Such delay may be avoided by
purchasing shares by wire or by certified or cashier's check.

REDEMPTION IN KIND. If the Directors determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make
payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in
the same manner as in a regular redemption. If your shares are redeemed in
kind, you would incur transaction costs in converting the assets into cash.
The Fund, however, has elected to be governed by Rule 18f-1 under the
Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the NAV of the Fund
during any 90-day period for any one shareholder.

INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No CDSC will be imposed
on any such involuntary redemption.

90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will
be credited (in shares) to your account. (If less than a full repurchase is
made, the credit will be on a pro rata basis.) You must notify the Transfer
Agent, either directly or through The Distributor or your broker, at the time
the repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege may affect federal tax
treatment of any gain realized upon redemption. However, if the redemption was
made within a 30-day period of the repurchase and if the redemption resulted
in a loss, some or all of the loss, depending on the amount reinvested, will
not be allowed for federal income tax purposes.

CONTINGENT DEFERRED SALES CHARGES

Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 3% to zero over a four-year period. Class C
shares redeemed within 18 months of purchase (one year for Class C shares
purchased

B-36
<PAGE>

before November 2, 1998) will be subject to a 1% CDSC. The CDSC will be
deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value
of your Class B or Class C shares to an amount which is lower than the amount
of all payments by you for shares during the preceding four years, in the case
of Class B shares, and 18 months, in the case of Class C shares (one year for
Class C shares purchased before November 2, 1998). A CDSC will be applied on
the lesser of the original purchase price or the current value of the shares
being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any CDSC will be paid to and retained by the Distributor.

The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. See "Shareholder Investment Account--Exchange Privilege."

The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First........................................ 3.0%
Second....................................... 2.0%
Third........................................ 1.0%
Fourth....................................... 1.0%
Fifth........................................ None
</TABLE>

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments
for the purchase of Fund shares made during the preceding four years for Class
B shares and 18 months for Class C shares (one year for Class C shares bought
before November 2, 1998); then of amounts representing the cost of shares held
beyond the applicable CDSC period; and finally, of amounts representing the
cost of shares held for the longest period of time within the applicable CDSC
period.

For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 2% (the applicable rate in the
second year after purchase) for a total CDSC of $4.80.

For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.

WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.

The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are:

(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement;

B-37
<PAGE>

(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59 1/2 or a periodic distribution
based on life expectancy;

(3) in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 59 1/2; and

(4) a tax-free return of an excess contribution or plan distributions
following the death or disability of the shareholder, provided that the
shares were purchased prior to death or disability.

The waiver does not apply in the case of a tax-free rollover or transfer of
assets, other than one following a separation from service (that is, following
voluntary or involuntary termination of employment or following retirement).
Under no circumstances will the CDSC be waived on redemptions resulting from
the termination of a tax-deferred retirement plan, unless such redemptions
otherwise qualify for a waiver as described above. In the case of Direct
Account and Prudential Securities or Subsidiary Prototype Benefit Plans, the
CDSC will be waived on redemptions which represent borrowings from such plans.
Shares purchased with amounts used to repay a loan from such plans on which a
CDSC was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.

Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential Mutual Funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable
Value Fund.

Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12%
of the total dollar amount subject to the CDSC may be redeemed without charge.
The Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased
prior to March 1, 1997, on March 1 of the current year. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% is reached.

In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Company.

You must notify the Transfer Agent either directly or through your broker,
at the time of redemption, that you are entitled to waiver of the CDSC and
provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement.

B-38
<PAGE>

In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.

<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
<S> <C>
Death A copy of the shareholder's death certificate or, in
the case of a trust, a copy of the grantor's death
certificate, plus a copy of the trust agreement
identifying the grantor.
Disability--An individual A copy of the Social Security Administration award
will be considered letter or a letter from a physician on the physician's
disabled if he or she is letterhead stating that the shareholder (or, in the
unable to engage in any case of a trust, the grantor) is permanently disabled.
substantial gainful The letter must also indicate the date of disability.
activity by reason of any
medically determinable
physical or mental
impairment which can be
expected to result in
death or to be of long-
continued and indefinite
duration.
Distribution from an IRA A copy of the distribution form from the custodial firm
or 403(b) Custodial indicating (i) the date of birth of the shareholder and
Account (ii) that the shareholder is over age 59 1/2 and is
taking a normal distribution--signed by the
shareholder.
Distribution from A letter signed by the plan administrator/trustee
Retirement Plan indicating the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the plan
administrator/trustee on company letterhead indicating
the amount of the excess and whether or not taxes have
been paid.
</TABLE>

The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.

QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994

While a quantity discount is not available for Class B shares of the Fund, a
quantity discount may apply with respect to Class B shares exchanged from
another Prudential Mutual Fund. The contingent deferred sales charge may be
reduced on redemptions of Class B shares of the Fund if the investor qualified
for a quantity discount upon the initial purchase of shares exchanged into the
Fund.

WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES

Prudential Retirement Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account, the Guaranteed Insulated Separate Account and units of The
Stable Value Fund.

Other Benefit Plans. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a broker not affiliated with Prudential and for
whom the broker provides administrative or recordkeeping services.

CONVERSION FEATURE--CLASS B SHARES

Class B shares will automatically convert to Class A shares on a quarterly
basis approximately five years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales
charge.

Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least five years prior to the conversion date to (b) the total amount paid for
all Class B shares purchased and then held in your account (ii)

B-39
<PAGE>

multiplied by the total number of Class B shares purchased and then held in
your account. Each time any Eligible Shares in your account convert to Class A
shares, all shares or amounts representing Class B shares then in your account
that were acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.

For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately five years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately five years from the initial purchase (that is, $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.

Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted.

For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately six years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.

The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class
Z shares will not constitute "preferential dividends" under the Internal
Revenue Code and (2) that the conversion of shares does not constitute a
taxable event. The conversion of Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Fund will continue to be subject,
possibly indefinitely, to their higher annual distribution and service fee.

SHAREHOLDER INVESTMENT ACCOUNT

Upon the initial purchase of shares of the Fund, a Shareholder Investment
Account is established for each investor under which a record of the shares
held is maintained by the Transfer Agent. If a stock certificate is desired,
it must be requested in writing for each transaction. Certificates are issued
only for full shares and may be redeposited in the Account at any time. There
is no charge to the investor for issuance of a certificate. The Fund makes
available to the shareholders the following privileges and plans.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An
investor may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the broker. Any
shareholder who receives a cash payment representing a dividend or
distribution may reinvest such dividend or distribution at NAV by returning
the check or the proceeds to the Transfer Agent within 30 days after the
payment date. The investment will be made at the NAV per share next determined
after receipt of the check or proceeds by the Transfer Agent. Such shareholder
will receive credit for any CDSC paid in connection with the amount of
proceeds being reinvested.

B-40
<PAGE>

EXCHANGE PRIVILEGE

The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to
the minimum investment requirements of such funds. Shares of such other
Prudential Mutual Funds may also be exchanged for shares of the Fund. An
exchange is treated as a redemption and purchase for federal income tax
purposes. All exchanges are made on the basis of the relative NAV next
determined after receipt of an order in proper form. An exchange will be
treated as a redemption and purchase for tax purposes. For retirement and
group plans having a limited menu of Prudential Mutual Funds, the exchange
privilege is available for those funds eligible for investment in the
particular program.

It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.

In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the
Transfer Agent and hold shares in non-certificate form. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. Neither the Fund nor its agents will be liable for any loss,
liability or cost which results from acting upon instructions reasonably
believed to be genuine under the foregoing procedures. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after
the request is received in good order.

If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.

If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged.

You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.

In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.

CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the exchange privilege only to acquire
Class A shares of the Prudential Mutual Funds participating in the exchange
privilege.

The following money market funds participate in the Class A exchange
privilege:

Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A Shares)
Prudential Tax-Free Money Fund, Inc.

B-41
<PAGE>

CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund,
Inc., respectively, No CDSC will be payable upon such exchange, but a CDSC may
be payable upon the redemption of the Class B and Class C shares acquired as a
result of the exchange. The applicable sales charge will be that imposed by
the fund in which shares were initially purchased and the purchase date will
be deemed to be the first day of the month after the initial purchase, rather
than the date of the exchange.

Class B and Class C shares of the Fund may also be exchanged for shares of
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after re-
exchange into the Company, such shares will be subject to the CDSC calculated
without regard to the time such shares were held in the money market fund. In
order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis
of their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a
money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month.
Thus, if shares are exchanged into the Fund from a money market fund during
the month (and are held in the Fund at the end of the month), the entire month
will be included in the CDSC holding period. Conversely, if shares are
exchanged into a money market fund prior to the last day of the month (and are
held in the money market fund on the last day of the month), the entire month
will be excluded from the CDSC holding period. For purposes of calculating the
five year holding period applicable to the Class B conversion feature, the
time period during which Class B shares were held in a money market fund will
be excluded.

At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund without subjecting such shares to any CDSC. Shares of any fund
participating in the Class B or Class C exchange privilege that were acquired
through reinvestment of dividends or distributions may be exchanged for Class
B or Class C shares of other funds, respectively, without being subject to any
CDSC.

CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.

SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for
shareholders who qualify to purchase Class Z shares. Under this exchange
privilege, amounts representing any Class B and Class C shares which are not
subject to a CDSC held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends
and distributions, (2) amounts representing the increase in the NAV above the
total amount of payments for the purchase of Class B or Class C shares and (3)
amounts representing Class B or Class C shares held beyond the applicable CDSC
period. Class B and Class C shareholders must notify the Transfer Agent either
directly or through Prudential Securities or, Prusec or another broker that
they are eligible for this special exchange privilege.

Participants in any fee-based program for which the Company is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntarily or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
NAV. Similarly, participants in Prudential Securities' 401(k) Plan for which
the Company's Class Z shares is an available option and who wish to transfer
their Class Z shares out of the Prudential Securities 401(k) Plan following
separation from service (i.e., voluntary or involuntary termination of
employment or retirement) will have their Class Z shares exchanged for Class A
shares at NAV.

Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Transfer Agent, the
Distributor or your Dealer. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.

B-42
<PAGE>

DOLLAR COST AVERAGING

Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.

Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university./1/

The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals./2/

<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS $100,000 $150,000 $200,000 $250,000
------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................ $ 105 $ 158 $ 210 $ 263
20 Years............................ 170 255 340 424
15 Years............................ 289 438 578 722
10 Years............................ 547 820 1,093 1,366
5 Years............................ 1,361 2,041 2,721 3,402
</TABLE>
See "Automatic Investment Plan."
- ----------
/1/Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.

/2/The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the
Portfolio. The investment return and principal value of an investment will
fluctuate so that an investor's shares when redeemed may be worth more or less
than their original cost.

AUTOMATIC INVESTMENT PLAN (AIP)

Under AIP, an investor may arrange to have a fixed amount automatically
invested in the shares of the Fund monthly by authorizing his or her bank
account or brokerage account (including a Prudential Securities COMMAND
Account) to be debited to invest specified dollar amounts in shares of the
Fund. The investor's bank must be a member of the Automatic Clearing House
System. Stock certificates are not issued to AIP participants.

Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.

SYSTEMATIC WITHDRAWAL PLAN

A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your broker. Such withdrawal plan provides
for monthly or quarterly checks in any amount, except as provided below, up to
the value of the shares in the shareholder's account. Withdrawals of Class B
or Class C shares may be subject to a CDSC.

In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan.

The Transfer Agent, the Distributor or your broker acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate
a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.

B-43
<PAGE>

Withdrawal payments should not generally be considered as dividends, yield
or income. If periodic withdrawals continuously exceed reinvested dividends
and distributions, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.

Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the applicable sales charges to
(i) the purchase of Class A and Class C shares and (ii) the redemption of
Class B and Class C shares. Each shareholder should consult his or her own tax
adviser with regard to the tax consequences of the plan, particularly if used
in connection with a retirement plan.

TAX-DEFERRED RETIREMENT PLANS

Various tax-deferred retirement plans, including a 401(k) plan, self-
directed individual retirement accounts and "tax-deferred accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from the Distributor or the Transfer Agent.

Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.

TAX-DEFERRED RETIREMENT ACCOUNTS

INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account
until the earnings are withdrawn (or in the case of a Roth IRA, the total
avoidance of federal income tax on such income).The following chart represents
a comparison of the earnings in a personal savings account with those in an
IRA, assuming a $2,000 annual contribution, an 8% rate of return and a 39.6%
federal income tax bracket and shows how much more retirement income can
accumulate within an IRA as opposed to a taxable individual savings account.

TAX-DEFERRED COMPOUNDING/1/

<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER SAVINGS IRA
-------------------------------------------------------- -------- --------
<S> <C> <C>
10 years................................................ $ 26,165 $ 31,291
15 years................................................ 44,675 58,649
20 years................................................ 68,109 98,846
25 years................................................ 97,780 157,909
30 years................................................ 135,346 244,692
</TABLE>
- --------
/1/ The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required
under the Internal Revenue Code will not be subject to tax upon withdrawal
from the account.

MUTUAL FUND PROGRAMS

From time to time, the Company may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios
will be selected and thereafter marketed collectively. Typically, these
programs are created with an investment theme, such as, to seek greater
diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The
Company may waive or reduce the minimum initial investment requirements in
connection with such a program.

The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, individuals should consult their financial
advisor concerning the appropriate blend of portfolios for them. If investors
elect to purchase the individual mutual funds that

B-44
<PAGE>

constitute the program in an investment ratio different from that offered by
the program, the standard minimum investment requirements for the individual
mutual funds will apply.

NET ASSET VALUE

The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Directors have fixed the specific time of day for the computation of the
Fund's net asset value to be as of 4:15 P.M., New York time.

Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sale price of such exchange system on the day of valuation or, if there
was no sale on such day, the mean between the last bid and asked prices on
such day, or at the bid price on such day in the absence of an asked price.
Corporate bonds (other than convertible debt securities) and U.S. Government
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued on the
basis of valuations provided by an independent pricing agent or principal
market maker which uses information with respect to transactions in bonds,
quotations from bond dealers, agency ratings, market transactions in
comparable securities and various relationships between securities in
determining value. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed by the Manager in consultation with the Subadviser to be
over-the-counter, are valued at the mean between the last reported bid and
asked prices provided by principal market makers. Options on stock and stock
indices traded on an exchange are valued at the mean between the most recently
quoted bid and asked prices on the respective exchange and futures contracts
and options thereon are valued at their last sale prices as of the close of
trading on the applicable commodities exchange or board of trade or, if there
was no sale on the applicable commodities exchange or board of trade on such
day, at the mean between the most recently quoted bid and asked prices on such
exchange or board of trade. Quotations of foreign securities in a foreign
currency are converted to U.S. dollar equivalents at the current rate obtained
from a recognized bank or dealer, and forward currency exchange contracts are
valued at the current cost of covering or offsetting such contacts. Should an
extraordinary event, which is likely to affect the value of the security,
occur after the close of an exchange on which a portfolio security is traded,
such security will be valued at fair value considering factors determined in
good faith by the investment adviser under procedures established by and under
the general supervision of the Fund's Board of Directors.

Securities or other assets for which reliable market quotations are not
available or for which the pricing agent or principal market maker does not
provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or the
Subadviser, including its portfolio manager, traders, and its research and
credit analysts, on the basis of the following factors: cost of the security,
transactions in comparable securities, relationships among various securities
and such other factors as may be determined by the Manager, Subadviser, Board
of Directors or Valuation Committee to materially affect the value of the
security. Short-term debt securities are valued at cost, with interest accrued
or discount amortized to the date of maturity, if their original maturity was
60 days or less, unless this is determined by the Directors not to represent
fair value. Short-term securities with remaining maturities of more than 60
days, for which market quotations are readily available, are valued at their
current market quotations as supplied by an independent pricing agent or
principal market maker. The Fund will compute its NAV at 4:15 P.M., New York
time, on each day the New York Stock Exchange is open for trading except on
days on which no orders to purchase, sell or redeem Fund shares have been
received or days on which changes in the value of the Fund's portfolio
securities do not affect NAV. In the event the New York Stock Exchange closes
early on any business day, the NAV of the Fund's shares shall be determined at
the time between such closing and 4:15 P.M., New York time. The New York Stock
Exchange is closed on the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.

As long as the Fund declares dividends daily, the net asset value of the
Class A, Class B, Class C and Class Z shares of the Fund will generally be the
same. It is expected, however, that the dividends, if any, will differ by
approximately the amount of the distribution and/or service fee expense
accrual differential among the classes.

B-45
<PAGE>

TAXES, DIVIDENDS AND DISTRIBUTIONS

The Fund declares dividends daily based on actual net investment income
determined in accordance with generally accepted accounting principles. Such
dividends will be payable monthly. The Fund's capital gains, if any, will be
distributed at least annually. In determining the amount of capital gains to
be distributed, any capital loss carryforwards from prior years will be offset
against capital gains. Dividends and distributions will be paid in additional
Class A, Class B, Class C or Class Z shares of the Fund based on net asset
value on the payment date or such other date as the Board of Directors may
determine, unless the shareholder elects in writing not less than five full
business days prior to the payment date to receive such distributions in cash.
In the event that a shareholder's shares are redeemed on a date other than the
monthly dividend payment date, the proceeds of such redemption will equal the
net asset value of the shares redeemed plus the amount of all dividends
declared through the date of redemption.

The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution fee applicable to the Class B and Class C shares. The per share
distributions of net capital gains, if any, will be paid in the same amount
for Class A, Class B, Class C and Class Z shares. See "Net Asset Value."

The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal income
tax on income and capital gains that are distributed to shareholders and
permits net capital gains of the Fund (i.e., the excess of net long-term
capital gains over net short-term capital losses) to be treated as long-term
capital gains of the shareholders, regardless of how long shareholders have
held their shares in the Fund.

Qualification as a regulated investment company will be determined at the
level of the Fund and not at the level of the Company. Accordingly, the
determination of whether the Fund qualifies as a regulated investment company
will be based on the activities of the Fund, including the purchases and sales
of securities and the income received and expenses incurred in the Fund. Net
capital gains of the Fund that are available for distribution to shareholders
will be computed by taking into account any capital loss carryforward of the
Fund.

Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the Fund's annual gross income, without
reduction for losses from the sale or other disposition of securities, be
derived from payments with respect to securities loans, interest, dividends,
and gains from the sale or other disposition of securities or options thereon,
or foreign currencies or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) the Fund diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the value of the Fund's assets is represented by cash, U.S. Government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of the value of the assets of the Fund and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its assets is invested in the securities of any one issuer
(other than U.S. Government securities); and (c) the Fund distribute to its
shareholders at least 90% of its net investment income and net short-term
gains (that is, the excess of net short-term capital gains over net long-term
capital losses) in each year.

The Fund may purchase debt securities that contain original issue discount.
Original issue discount that accrues in a taxable year is treated as income
earned by the Fund and therefore is subject to the distribution requirements
of the Internal Revenue Code. Because the original issue discount income
earned by the Fund in a taxable year may not be represented by cash income,
the Fund may have to dispose of other securities and use the proceeds to make
distributions to satisfy the Internal Revenue Code's distribution
requirements. Debt securities acquired by the Fund also may be subject to the
market discount rules.

Distributions of net investment income and realized net short-term capital
gains of the Fund are taxable to shareholders of the Fund as ordinary income,
whether such distributions are taken in cash or reinvested in additional
shares. Distributions of net capital gains (that is, the excess of capital
gains from the sale of assets held for more than 12 months over net short-term
capital losses), if any, are taxable as capital gains regardless of whether
the shareholder received such distribution in additional shares or in cash or
of how long shares of the Fund have been held. The maximum capital gains rate
for individuals is 20%. The maximum capital gains rate for corporate
shareholders currently is the same as the maximum tax rate for ordinary
income. Distributions and dividends paid by the Fund generally will not be
eligible for the dividends-received deduction for corporate shareholders. Tax-
exempt shareholders generally will not be required to pay taxes on amounts
distributed to them.

B-46
<PAGE>

Special rules will apply to futures contracts and options thereon in which
the Fund invests. See "Description of the Fund, Its Investments and Risks."
These investments will generally constitute "Section 1256 contracts" and will
be required to be "marked to market" for federal income tax purposes at the
end of the Fund's taxable year; that is, treated as having been sold at market
value. Sixty percent of any gain or loss recognized on such "deemed sales" and
on actual dispositions will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss.

The Fund is subject to a nondeductible 4% excise tax if it does not
distribute 98% of its ordinary income on a calendar year basis and 98% of its
capital gains on an October 31 year-end basis. The Fund intends to distribute
its income and capital gains in the manner necessary to avoid imposition of
the 4% excise tax. Dividends and distributions generally are taxable to
shareholders in the year in which they are received or accrued; however,
dividends declared in October, November and December payable to shareholders
of record on a specified date in October, November and December and paid in
the following January will be treated as having been paid by the Fund and
received by shareholders in such prior year. Under this rule, a shareholder
may be taxed in one year on dividends or distributions actually received in
January of the following year.

Any gain or loss realized upon a sale or redemption of shares of the Fund by
a shareholder who is not a dealer in securities will be treated as capital
gain or loss. Any such capital gain or loss will be treated as long-term
capital loss if the shares were held for more than 12 months. In the case of
an individual, the maximum long-term capital gains rate is 20%. However, any
loss realized by a shareholder upon the sale of shares of the Fund held by the
shareholder for six months or less will be treated as long-term capital loss
to the extent of any capital gains distributions received by the shareholder.

Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.

Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which the Fund will be subject, since the amount of the
Fund's assets to be invested in various countries will vary.

A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes
of calculating gain or loss realized upon a sale or exchange of shares of the
Fund.

Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the dividends or distributions.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to federal income taxes. Therefore, prior to purchasing
shares of the Fund, the investor should carefully consider the impact of
dividends or capital gains distributions which are expected to be or have been
announced.

Dividends and distributions and gains on the sales of Fund shares also may
be subject to additional state and local taxes. See "Fund Distributions and
Tax Issues" in the Prospectus.

If any net capital gains are retained by the Fund for investment, requiring
federal income taxes to be paid thereon by the Fund, the Fund will elect to
treat these capital gains as having been distributed to shareholders. As a
result, these amounts will be taxed to shareholders as long-term capital
gains, and shareholders will be able to claim their proportionate share of the
federal income taxes paid by the Fund on the gains as a credit against their
own federal income tax liabilities and will be entitled to increase the
adjusted tax basis of their shares in the Fund by the difference between their
pro rata share of such gains and their tax credit.

Under federal income tax law, the Fund will be required to report to the
Internal Revenue Service all distributions of taxable income and capital gains
as well as gross proceeds from the redemption or exchange of shares of the
Fund, except in the case of certain exempt shareholders. Further, all such
distributions and proceeds from the redemption or exchange of shares may be
subject to withholding of federal income tax at the rate of 31% in the case of
nonexempt shareholders who fail to furnish the Company with their taxpayer
identification numbers on IRS Form W-9 and with required certifications
regarding their status under the federal income tax law. If the withholding
provisions are applicable, any such distributions

B-47
<PAGE>

and proceeds, whether taken in cash or reinvested in shares, will be reduced
by the amounts required to be withheld. Investors may wish to consult their
tax advisers about the applicability of the backup withholding provisions.

Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a
nominee or fiduciary) who is a nonresident alien individual, a foreign
corporation or a foreign partnership (foreign shareholder) are subject to a
30% (or lower treaty rate) withholding tax upon the gross amount of the
dividends unless the dividends are effectively connected with a U.S. trade or
business conducted by the foreign shareholder. Capital gain dividends paid to
a foreign shareholder are generally not subject to withholding tax. A foreign
shareholder will, however, be required to pay U.S. income tax on any dividends
and capital gain distributions which are effectively connected with a U.S.
trade or business of the foreign shareholder.

Distributions of net investment income and net capital gains will be taxable
as described below, whether made in shares or in cash. Shareholders electing
to receive distributions in the form of additional shares will have a cost
basis for federal income tax purposes in each share so received equal to the
net asset value of a share of the Fund on the distribution date. All
distributions of taxable net investment income and net capital gains, whether
received in shares or cash, must be reported by each shareholder on his or her
federal income tax return.

PERFORMANCE INFORMATION

AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "Risk/Return
Summary--Evaluating Performance" in the Prospectus.

Average annual total return is computed according to the following formula:

P(1+T)/to the power of n/ = ERV

Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods (or
fractional portion thereof) of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods.

Average annual return assumes reinvestment of all dividends and
distributions and takes into account any applicable initial or contingent
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption.

Below are the average annual total returns for the Fund's share classes for
the periods ended December 31, 1998.

<TABLE>
<CAPTION>
1 5 10 SINCE INCEPTION
YEAR YEARS YEARS INCEPTION DATE
---- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Class A................................... 3.34% 5.19% N/A 7.03%* 9-1-89
Class B................................... 3.03% 5.17% N/A 5.38% 12-9-92
Class C................................... 3.97% N/A N/A 5.92% 8-1-94
Class Z................................... 6.92% N/A N/A 7.13% 12-16-96
</TABLE>
- --------
* Figures include expense subsidies and management fee waiver. Average annual
total return for the since inception period ended December 31, 1998 before
expense subsidies and management fee waiver is 6.76%.

AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "RIsk/Return Summary--Evaluating Performance"
in the Prospectus.

B-48
<PAGE>

Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed by the following formula:

ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value at the end of the 1, 5, or 10 year
periods (or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year periods.

Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.

Below are the aggregate total returns for the Fund's share classes for the
periods ended December 31, 1998.
<TABLE>
<CAPTION>
1 5 10 SINCE INCEPTION
YEAR YEARS YEARS INCEPTION DATE
---- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Class A.................................. 6.81% 33.08% N/A 94.90%* 9-1-89
Class B.................................. 6.03% 28.68% N/A 37.38% 12-9-92
Class C.................................. 6.03% N/A N/A 30.19% 8-1-94
Class Z.................................. 6.92% N/A N/A 15.09% 12-16-96
</TABLE>

* Figures include expense subsidies and management fee waiver. Aggregate total
return for the since inception period ended December 31, 1998 before expense
subsidies and management fee waiver is 90.29%.

YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, Class C
and Class Z shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:

a - b
YIELD = 2[(------- +1)/to the 6th power/ -1]
cd

Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.

Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.

The yields for the 30-day period ended December 31, 1998 for the Portfolio's
Class A, Class B, Class C and Class Z shares were 5.36%, 4.88%, 4.84% and
5.63%, respectively.

B-49
<PAGE>

The Fund also may include comparative performance information in advertising
or marketing the Fund's shares. Such performance information may include data
from Lipper, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. Set forth below is a
chart which compares the performance of different types of investments over
the long-term and the rate of inflation./1/

[BAR GRAPH APPEARS HERE]

Performance Comparison of Different
Types of Investments Over
The Long Term
(12/31/25 - 12/31/98)

Common Stocks 11.2%

Long-Term Gov't. Bonds 5.3%

Inflation 3.1%

/1/Source: Ibbotson Associates. Used with permission. All rights reserved.
Common stock returns are based on the Standard & Poor's 500 Stock Index, a
market-weighted, unmanaged index of 500 common stocks in a variety of industry
sectors. It is a commonly used indicator of broad stock price movements. This
chart is for illustrative purposes only, and is not intended to represent the
performance of any particular investment or fund. Investors cannot invest
directly in an index. Past performance is not a guarantee of future results.

B-50
<PAGE>

Commentary on Presentation of Portfolio of Investments:

The Portfolio of Investments, following hereto, is presented in a "laddered"
maturity structure. The Income Portfolio invests in investment grade corporate
debt securities and in obligations of the U.S. Government, its agencies and
instrumentalities with maturities of six years or less. These securities are
categorized within six annual maturity+ categories.
- --------------------------------------------------------------------------------

Moody's Principal
Rating** Amount
(Unaudited) (000) Description Value (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5-6 YEARS--15.4%
Baa1 $ 2,500 PaineWebber Group, Inc.,
7.015%, 2/10/04 $ 2,620,350
Baa3 2,500 Saks, Inc.,
7.25%, 12/1/04 2,508,875
Aaa 13,450 United States Treasury
Notes,
7.25%, 5/15/04 15,074,491
-------------
20,203,716
- --------------------------------------------------------------------------------
4-5 YEARS--17.3%
Baa1 2,500 Cendant Corp.,
7.75%, 12/1/03 2,526,675
Ba3 1,000 Contifinancial Corp.,
8.375%, 8/15/03 700,000
Ba2 550 Fred Meyer, Inc.,
7.15%, 3/1/03 572,209
A2 2,500 General Motors Acceptance
Corp.,
5.75%, 11/10/03 2,519,400
Ba1 2,000 ITT Corp.,
6.75%, 11/15/03 1,841,660
A2 3,000 Mellon Financial Co.,
5.75%, 11/15/03 3,020,790
Aa3 3,000 Merrill Lynch & Co., Inc.,
6.00%, 2/12/03 3,045,000
Baa3 2,000 Niagara Mohawk Power
Corp.,
7.375%, 8/1/03 2,113,820
Ba1 1,000 R & B Falcon Corp.,
6.50%, 4/15/03 908,320
Ba1 2,300 Seagull Energy Corp.,
7.875%, 8/1/03 2,334,500
AAA* 3,000 Toyota Motor Credit Corp.,
5.625%, 11/13/03 3,022,950
-------------
22,605,324
- --------------------------------------------------------------------------------

3-4 YEARS--14.5%
Baa2 $ 3,820 MCI Communications Corp.,
6.125%, 4/15/02 3,878,140
United States Treasury
Notes,
Aaa 7,500 6.25%, 6/30/02 7,872,675
Aaa 7,000 5.75%, 11/30/02 7,257,040
-------------
19,007,855
- --------------------------------------------------------------------------------
2-3 YEARS--17.4%
Baa3 3,000 A T & T Capital Corp.,
Medium Term Note,
6.25%, 5/15/01 2,959,170
Baa3 5,000 Capital One Bank,
7.08%, 10/30/01 5,027,850
Baa3 1,000 Continental Cablevision,
Inc.,
8.50%, 9/15/01 1,060,760
Baa2 5,000 First Industrial L. P.,
6.50%, 4/5/01 4,924,850
Baa2 4,000 Mallinckrodt, Inc.,
6.30%, 3/15/01++ 3,938,250
Ba1 5,000 United States Filter
Corp.,
6.375%, 5/15/11, putable
in May 2001 4,946,400
-------------
22,857,280
- --------------------------------------------------------------------------------
1-2 YEARS--17.6%
Baa2 5,000 Camden Property Trust,
7.23%, 10/30/00 5,012,000
Baa1 3,000 Comdisco, Inc., Medium
Term Note,
6.32%, 11/27/00 3,013,980
A3 4,500 ERP Operating L.P.,
6.15%, 9/15/00 4,470,300
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-51

<PAGE>

Portfolio of Investments as of PRUDENTIAL STRUCTURED MATURITY FUND, INC.
December 31, 1998 INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating** Amount
(Unaudited) (000) Description Value (Note 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1-2 YEARS--(cont'd.)
Baa2 $ 4,000 Gables Realty L.P.,
6.55%, 10/1/00 $ 4,003,360
Baa1 2,500 Ryder System Inc., Medium
Term Note,
7.51%, 3/24/00 2,563,400
Baa2 4,000 Safeway, Inc.,
5.75%, 11/15/00 4,008,000
-------------
23,071,040
- -------------------------------------------------------------------------------
WITHIN 1 YEAR--15.0%
B2 7,000 Advanta Corp.,
7.25%, 8/16/99 6,944,350
Baa1 3,000 Crane Co.,
7.25%, 6/15/99 3,026,910
Baa2 1,000 Federal Express Corp.,
10.05%, 6/15/99 1,020,180
Baa3 3,000 TCI Communications, Inc.,
6.375%, 9/15/99 3,021,090
5,615 Joint Repurchase Agreement
Account (Note 5)
4.69%, 1/4/99 5,615,000
-------------
19,627,530
- -------------------------------------------------------------------------------
Total Investments--97.2%
(cost $127,749,253; Note 4) 127,372,745
Other assets in excess of
liabilities--2.8% 3,655,439
-------------
Net Assets--100% $ 131,028,184
=============
</TABLE>
- ---------------
* Standard & Poor's Rating.
** The Fund's current Prospectus contains a description of Moody's and Standard
& Poor's rating.
+ Average life is defined as the weighted average time to the return of a
dollar of principal and is commonly used as the measure of investment life
for pass-through securities such as asset-backed and mortgage-backed
securities.
++ Mandatory put/call in March 2001.
L.P. Limited Partnership.

- --------------------------------------------------------------------------------

The industry classification of portfolio holdings and other net assets shown as
a percentage of net assets as of December 31, 1998 were as follows:

<TABLE>
<S> <C>
U.S. Government Securities............................ 23.0%
Financial Services.................................... 21.3
Industrial Services................................... 21.2
Consumer Finance...................................... 9.5
Telecommunications.................................... 6.0
Repurchase Agreement.................................. 4.3
Banking............................................... 3.8
Utilities............................................. 3.4
Transportation........................................ 2.0
Retail................................................ 1.9
Consumer Services..................................... 0.8
Other assets in excess of liabilities................. 2.8
-----
100.0%
=====
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-52

<PAGE>

PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Statement of Assets and Liabilities INCOME PORTFOLIO
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Assets December 31, 1998
-----------------
<S> <C>
Investments, at value (cost $127,749,253)............................................................... $ 127,372,745
Cash.................................................................................................... 39,996
Receivable for Fund shares sold......................................................................... 2,556,640
Interest receivable..................................................................................... 1,518,353
Other assets............................................................................................ 3,207
---------------
Total assets......................................................................................... 131,490,941
---------------
Liabilities
Accrued expenses........................................................................................ 198,824
Payable for Fund shares reacquired...................................................................... 163,339
Management fee payable.................................................................................. 44,007
Distribution fee payable................................................................................ 35,291
Dividends payable....................................................................................... 21,296
---------------
Total liabilities.................................................................................... 462,757
---------------
Net Assets.............................................................................................. $ 131,028,184
===============
Net assets were comprised of:
Common stock, at par................................................................................. $ 114,775
Paid-in capital in excess of par..................................................................... 139,501,371
---------------
139,616,146
Accumulated net realized loss on investments......................................................... (8,211,454)
Net unrealized depreciation on investments........................................................... (376,508)
---------------
Net assets at December 31, 1998......................................................................... $ 131,028,184
===============
Class A:
Net asset value and redemption price per share
($85,213,489 / 7,463,503 shares of common stock issued and outstanding)........................... $11.42
Maximum sales charge (3.25% of offering price)....................................................... .38
------
Maximum offering price to public..................................................................... $11.80
======
Class B:
Net asset value, offering price and redemption price per share
($39,693,642 / 3,477,798 shares of common stock issued and outstanding)........................... $11.41
======
Class C:
Net asset value and redemption price per share
($1,506,895 / 132,028 shares of common stock issued and outstanding).............................. $11.41
Sales charge (1% of offering price).................................................................. .11
------
Offering price to public............................................................................. $11.52
======
Class Z:
Net asset value, offering price and redemption price per share
($4,614,158 / 404,142 shares of common stock issued and outstanding).............................. $11.42
======
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-53

<PAGE>

PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1998
-----------------
<S> <C>
Income
Interest.............................. $9,074,661
----------
Expenses
Management fee........................ 533,582
Distribution fee--Class A............. 73,382
Distribution fee--Class B............. 426,851
Distribution fee--Class C............. 10,132
Transfer agent's fees and expenses.... 190,000
Custodian's fees and expenses......... 75,000
Registration fees..................... 50,000
Reports to shareholders............... 25,000
Audit fee and expenses................ 25,000
Directors' fees and expenses.......... 21,000
Legal fees and expenses............... 16,000
Miscellaneous......................... 10,652
----------
Total expenses..................... 1,456,599
----------
Net investment income.................... 7,618,062
----------
Realized and Unrealized Gain
on Investments
Net realized gain on investment
transactions.......................... 353,315
Net change in unrealized depreciation of
investments........................... 411,669
----------
Net gain on investments.................. 764,984
----------
Net Increase in Net Assets
Resulting from Operations................ $8,383,046
==========
</TABLE>

PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
Statement of Changes in Net Assets
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
Increase (Decrease) ---------------------------------
in Net Assets 1998 1997
-------------- -------------
<S> <C> <C>
Operations
Net investment income........ $ 7,618,062 $ 9,514,345
Net realized gain on
investment transactions... 353,315 2,023,447
Net change in unrealized
appreciation
(depreciation) on
investments............... 411,669 (1,892,170)
------------ ------------
Net increase in net assets
resulting from
operations................ 8,383,046 9,645,622
------------ ------------
Dividends (Note 1)
Dividends from net investment
income
Class A................... (4,389,692) (4,623,453)
Class B................... (3,050,724) (4,791,826)
Class C................... (72,180) (78,062)
Class Z................... (105,466) (21,004)
------------ ------------
(7,618,062) (9,514,345)
------------ ------------
Dividends in excess of net
investment income
Class A................... -- (114,961)
Class B................... -- (124,751)
Class C................... -- (2,340)
Class Z................... -- (1,592)
------------ ------------
-- (243,644)
------------ ------------
Fund share transactions
(Net of share conversions)
(Note 6)
Net proceeds from shares
subscribed................ 39,833,378 13,181,656
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions......... 5,214,748 6,601,473
Cost of shares reacquired.... (53,344,205) (54,029,826)
------------ ------------
Net decrease in net assets
from
Fund share transactions... (8,296,079) (34,246,697)
------------ ------------
Total decrease.................. (7,531,095) (34,359,064)
Net Assets
Beginning of year............... 138,559,279 172,918,343
------------ ------------
End of year..................... $131,028,184 $138,559,279
============ ============
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-54

<PAGE>

PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Notes to Financial Statements INCOME PORTFOLIO
- --------------------------------------------------------------------------------

Prudential Structured Maturity Fund, Inc. (the "Fund"), is registered under the
Investment Company Act of 1940, as a diversified, open-end management investment
company. The Fund consists of two portfolios--the Income Portfolio (the
"Portfolio") and the Municipal Income Portfolio. The Municipal Income Portfolio
has not yet begun operations. The Portfolio's investment objective is high
current income consistent with the preservation of principal. The ability of
issuers of debt securities held by the Portfolio to meet their obligations may
be affected by economic developments in a specific industry or region.

- --------------------------------------------------------------------------------
Note 1. Accounting Policies

The following is a summary of significant accounting policies followed by the
Portfolio in the preparation of its financial statements.

Securities Valuation: The Board of Directors has authorized the use of an
independent pricing service to determine valuations of U.S. Government and
corporate obligations. The pricing service considers such factors as security
prices, yields, maturities, call features, ratings and developments relating to
specific securities in arriving at securities valuations. When market quotations
are not readily available, a security is valued by appraisal at its fair value
as determined in good faith under procedures established under the general
supervision and responsibility of the Board of Directors.

Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.

In connection with transactions in repurchase agreements, the Portfolio's
custodian or designated subcustodians, as the case may be under triparty
repurchase agreements, takes possession of the underlying collateral securities,
the value of which at least equals the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Portfolio may be delayed or limited.

Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. Expenses are recorded on the accrual basis which may require the
use of certain estimates by management.

Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.

Federal Income Taxes: It is the Portfolio's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income and capital gains, if
any, to its shareholders. Therefore, no federal income tax provision is
required.

Dividends and Distributions: The Portfolio declares daily and pays monthly
dividends from net investment income. Distributions from net capital gains, if
any, are made at least annually. Dividends and distributions are recorded on the
ex-dividend date.

Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.

Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants, Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease paid-in capital and decrease accumulated net
realized loss by $546 due to the sale of securities purchased with market
discount. Net investment income, net realized gains and net assets were not
affected by this change.

- --------------------------------------------------------------------------------
Note 2. Agreements

The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers and employees of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.

The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .40 of 1% of the average daily net assets of the Portfolio.

- --------------------------------------------------------------------------------
B-55

<PAGE>

PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Notes to Financial Statements INCOME PORTFOLIO
- --------------------------------------------------------------------------------

The Fund had a distribution agreement with Prudential Securities Incorporated
("PSI"), which acted as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential Investment
Management Services LLC ("PIMS") became the distributor of the Fund effective
June 1, 1998 and is serving the Fund under the same terms and conditions as
under the arrangement with PSI. The Fund compensated PSI and PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution, (the "Class A, B and C Plans"), regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly. No distribution or service fees were paid to PSI or PIMS as
distributor of the Class Z shares of the Fund.

Pursuant to the Class A, B and C Plans, the Fund compensated PSI and PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .10 of 1%, .75 of 1% and .75 of 1% of the
average daily net assets of the Class A, B and C shares, respectively for the
year ended December 31, 1998. Effective January 1, 1999, the annual rate for
Class A shares was increased to .25 of 1%.

PSI and PIMS have advised the Portfolio that they have received approximately
$25,800 in front-end sales charges resulting from sales of Class A shares and
after November 2, 1998, Class C shares for the year ended December 31, 1998.
From these fees, PSI and PIMS paid such sales charges to Pruco Securities
Corporation, an affiliated broker-dealer, which in turn paid commissions to
salespersons and incurred other distribution costs.

PSI and PIMS have advised the Portfolio that for the year ended December 31,
1998, they received approximately $45,400 and $300 in contingent deferred sales
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.

PSI, PIFM, PIMS and PIC are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.

The Fund, along with other affiliated registered investment companies (the
"Funds"), has a credit agreement (the "Agreement") with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement during the year
ended December 31, 1998. The Funds pay a commitment fee at an annual rate of
.055 of 1% on the unused portion of the credit facility. The commitment fee is
accrued and paid quarterly on a pro-rata basis by the Funds. The Agreement
expired on December 29, 1998 and has been extended through February 28, 1999
under the same terms.

- --------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates

Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Portfolio's transfer agent. During the year ended December 31,
1998, the Portfolio incurred fees of approximately $186,000 for the services of
PMFS. As of December 31, 1998, approximately $14,400 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations also
include certain out-of-pocket expenses paid to nonaffiliates.

- --------------------------------------------------------------------------------
Note 4. Portfolio Securities

Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended December 31, 1998 were $376,201,387 and $383,597,026,
respectively.

The cost of investments for federal income tax purposes at December 31, 1998 was
$127,763,034 and accordingly, net unrealized depreciation for federal income tax
purposes was $390,289 (gross unrealized appreciation--$717,137; gross unrealized
depreciation--$1,107,426).

For federal income tax purposes, the Portfolio had a capital loss carryforward
as of December 31, 1998 of approximately $8,231,000, of which $5,082,000 expires
in 2002 and $3,149,000 expires in 2004. Such carryforward is after utilization
of approximately $309,000 to offset the Portfolio's net taxable gains recognized
in the year ended December 31, 1998. Accordingly, no capital gain distributions
are expected to be paid to shareholders until net gains have been realized in
excess of such carryforward.

- --------------------------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account

The Portfolio, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. As of December
31, 1998, the Portfolio has a .816% undivided interest in the joint account. The
undivided interest for the Portfolio represents $5,615,000 in the principal
amount. As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:

- --------------------------------------------------------------------------------
B-56

<PAGE>

PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Notes to Financial Statements INCOME PORTFOLIO
- --------------------------------------------------------------------------------

Bear Stearns & Co., Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest was $169,478,699.

Deutsche Bank Securities Inc., 4.80%, in the principal amount of $100,000,000,
repurchase price $100,053,333, due 1/4/99. The value of the collateral including
accrued interest was $102,001,052.

Goldman Sachs & Co., 4.25%, in the principal amount of $93,088,000, repurchase
price $93,131,958, due 1/4/99. The value of the collateral including accrued
interest was $94,950,662.

Morgan (J.P.) Securities Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest was $168,300,696.

Warburg Dillon Read LLC, 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest was $168,529,699.

- --------------------------------------------------------------------------------
Note 6. Capital

The Portfolio offers Class A, Class B, Class C and Class Z shares. Class A
shares are sold with a front-end sales charge of up to 3.25%. Class B shares are
sold with a contingent deferred sales charge which declines from 3% to zero
depending on the period of time the shares are held. Prior to November 2, 1998,
Class C shares were sold with a contingent deferred sale charge of 1% during the
first year. Effective November 2, 1998, Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares automatically convert to Class A shares on a quarterly
basis approximately five years after purchase. A special exchange privilege is
also available for shareholders who qualified to purchase Class A shares at net
asset value. Class Z shares are not subject to any sales or redemption charge
and are offered exclusively for sale to a limited group of investors.

There are 250 million authorized shares of $.01 par value common stock, divided
into four classes, designated Class A, Class B, Class C and Class Z common
stock, each of which consists of 62,500,000 authorized shares. Transactions in
shares of common stock were as follows:

<TABLE>
<CAPTION>
Class A Shares Amount
- ------- ---------- ------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold........................... 1,187,754 $ 13,587,731
Shares issued in reinvestment of
dividends........................... 268,042 3,061,266
Shares reacquired..................... (1,573,390) (17,967,851)
---------- ------------
Net decrease in shares outstanding
before conversion................... (117,594) (1,318,854)
Shares issued upon conversion from
Class B............................. 1,817,276 20,807,459
---------- ------------
Net increase in shares outstanding.... 1,699,682 $ 19,488,605
========== ============
Year ended December 31, 1997:
Shares sold........................... 516,648 $ 5,870,704
Shares issued in reinvestment of
dividends........................... 285,589 3,247,978
Shares reacquired..................... (2,158,614) (24,539,475)
---------- ------------
Net decrease in shares outstanding
before conversion................... (1,356,377) (15,420,793)
Shares issued upon conversion from
Class B............................. 340,959 3,874,591
---------- ------------
Net decrease in shares outstanding.... (1,015,418) $(11,546,202)
========== ============

Class B
- -------
Year ended December 31, 1998:
Shares sold........................... 866,989 $ 9,909,284
Shares issued in reinvestment of
dividends........................... 174,565 1,992,901
Shares reacquired..................... (2,005,389) (22,904,458)
---------- ------------
Net decrease in shares outstanding
before conversion................... (963,835) (11,002,273)
Shares reacquired upon conversion into
Class A............................. (1,818,128) (20,807,459)
---------- ------------
Net decrease in shares outstanding.... (2,781,963) $(31,809,732)
========== ============
Year ended December 31, 1997:
Shares sold........................... 503,206 $ 5,716,542
Shares issued in reinvestment of
dividends........................... 286,879 3,260,990
Shares reacquired..................... (2,508,326) (28,509,261)
---------- ------------
Net decrease in shares outstanding
before conversion................... (1,718,241) (19,531,729)
Shares reacquired upon conversion into
Class A............................. (340,959) (3,874,591)
---------- ------------
Net decrease in shares outstanding.... (2,059,200) $(23,406,320)
========== ============

Class C
- -------
Year ended December 31, 1998:
Shares sold........................... 55,465 $ 633,410
Shares issued in reinvestment of
dividends........................... 5,916 67,555
Shares reacquired..................... (45,186) (515,505)
---------- ------------
Net increase in shares outstanding.... 16,195 $ 185,460
========== ============
Year ended December 31, 1997:
Shares sold........................... 34,321 $ 390,314
Shares issued in reinvestment of
dividends........................... 6,203 70,513
Shares reacquired..................... (47,631) (540,812)
---------- ------------
Net decrease in shares outstanding.... (7,107) $ (79,985)
========== ============
</TABLE>

- --------------------------------------------------------------------------------
B-57

<PAGE>

PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Notes to Financial Statements INCOME PORTFOLIO
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class Z Shares Amount
- ------- ---------- ------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold........................... 1,369,668 $ 15,702,953
Shares issued in reinvestment of
dividends........................... 8,140 93,026
Shares reacquired..................... (1,042,730) (11,956,391)
---------- ------------
Net increase in shares outstanding.... 335,078 $ 3,839,588
========== ============

Year ended December 31, 1997:
Shares sold........................... 105,897 $ 1,204,096
Shares issued in reinvestment of
dividends........................... 1,931 21,992
Shares reacquired..................... (38,782) (440,278)
---------- ------------
Net increase in shares outstanding.... 69,046 $ 785,810
========== ============
</TABLE>

- --------------------------------------------------------------------------------
B-58

<PAGE>

TOTAL RETURN(a):........................ 6.81% 6.81% 4.32% 13.12% (1.16)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $85,213 $65,431 $77,031 $88,982 $ 91,680
Average net assets (000)................ $73,382 $70,899 $81,745 $89,500 $106,737
Ratios to average net assets:
Expenses, including distribution
fees.............................. .81% .94% .86% .82% .94%
Expenses, excluding distribution
fees.............................. .71% .84% .76% .72% .84%
Net investment income................ 5.98% 6.51% 6.38% 6.57% 5.88%
For Class A, B, C and Z shares:
Portfolio turnover................... 301% 180% 170% 160% 123%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59

<PAGE>

PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Financial Highlights INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 11.35 $ 11.36 $ 11.63 $ 10.97 $ 11.78
------- ------- -------- -------- --------
Income from investment operations:
Net investment income................... .61 .67 .65 .66 .58
Net realized and unrealized gain (loss)
on investment transactions........... .06 .01 (.25) .66 (.80)
------- ------- -------- -------- --------
Total from investment operations..... .67 .68 .40 1.32 (.22)
------- ------- -------- -------- --------
Less distributions:
Dividends from net investment income.... (.61) (.67) (.65) (.66) (.58)
Dividends in excess of net investment
income............................... -- (.02) (.02) -- (.01)
Distributions from net realized gains... -- -- -- -- --
------- ------- -------- -------- --------
Total distributions.................. (.61) (.69) (.67) (.66) (.59)
------- ------- -------- -------- --------
Net asset value, end of year............ $ 11.41 $ 11.35 $ 11.36 $ 11.63 $ 10.97
======= ======= ======== ======== ========
TOTAL RETURN(a):........................ 6.03% 6.13% 3.64% 12.40% (1.83)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $39,694 $71,030 $94,490 $120,188 $130,258
Average net assets (000)................ $56,913 $81,673 $106,224 $125,230 $134,985
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.46% 1.59% 1.51% 1.47% 1.66%
Expenses, excluding distribution
fees.............................. .71% .84% .76% .72% .84%
Net investment income................ 5.36% 5.87% 5.73% 5.92% 5.17%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-60

<PAGE>

PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Financial Highlights INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
-------------------------------------------------------- -----------------
August 1,
1994(c) Year Ended
Year Ended December 31, Through December 31,
--------------------------------------- December 31, -----------------
1998 1997 1996 1995 1994 1998 1997
------ ------ ------ ------ ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $11.35 $11.36 $11.63 $10.97 $11.30 $11.35 $11.37
------ ------ ------ ------ ----- ------ ------
Income from investment operations:
Net investment income................... .61 .67 .65 .66 .23 .69 .77
Net realized and unrealized gain (loss)
on investment transactions........... .06 .01 (.25) .66 (.32) .07 .02
------ ------ ------ ------ ----- ------ ------
Total from investment operations..... .67 .68 .40 1.32 (.09) .76 .79
------ ------ ------ ------ ----- ------ ------
Less distributions:
Dividends from net investment income.... (.61) (.67) (.65) (.66) (.23) (.69) (.77)
Dividends in excess of net investment
income............................... -- (.02) (.02) -- (.01) -- (.04)
------ ------ ------ ------ ----- ------ ------
Total distributions.................. (.61) (.69) (.67) (.66) (.24) (.69) (.81)
------ ------ ------ ------ ----- ------ ------
Net asset value, end of period.......... $11.41 $11.35 $11.36 $11.63 $10.97 $11.42 $11.35
====== ====== ====== ====== ===== ====== ======
TOTAL RETURN(a):........................ 6.03% 6.13% 3.64% 12.40% (0.68)% 6.92% 7.01%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $1,507 $1,314 $1,396 $1,050 $ 371 $4,614 $ 784
Average net assets (000)................ $1,351 $1,329 $1,270 $ 667 $ 192 $1,748 $ 313
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.46% 1.59% 1.51% 1.47% 1.90%(b) .71% .84%
Expenses, excluding distribution
fees.............................. .71% .84% .76% .72% 1.15%(b) .71% .84%
Net investment income................ 5.36% 5.87% 5.73% 5.92% 5.30%(b) 6.03% 6.71%

<CAPTION>
Class Z
------------
December 16,
1996(d)
Through
December 31,
1996
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $11.41
-----
Income from investment operations:
Net investment income................... .09
Net realized and unrealized gain (loss)
on investment transactions........... (.02)
-----
Total from investment operations..... .07
-----
Less distributions:
Dividends from net investment income.... (.09)
Dividends in excess of net investment
income............................... (.02)
-----
Total distributions.................. (.11)
-----
Net asset value, end of period.......... $11.37
=====
TOTAL RETURN(a):........................ .59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 200(e)
Average net assets (000)................ $ 200(e)
Ratios to average net assets:
Expenses, including distribution
fees.............................. .76%(b)
Expenses, excluding distribution
fees.............................. .76%(b)
Net investment income................ 6.48%(b)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than one full year are not
annualized.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Figures are actual and are not rounded to the nearest thousand.

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-61

<PAGE>

PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Report of Independent Accountants INCOME PORTFOLIO
- --------------------------------------------------------------------------------

To the Shareholders and Board of Directors of
Prudential Structured Maturity Fund, Inc., Income Portfolio:

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Structured Maturity
Fund, Inc., Income Portfolio (the 'Fund') at December 31, 1998, the results of
its operations for the year then ended, and the changes in its net assets and
the financial highlights for each of the two years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for each of
the three periods in the period ended December 31, 1996 were audited by other
independent accountants, whose opinion dated February 14, 1997 was unqualified.

PricewaterhouseCoopers LLP

1177 Avenue of the Americas
New York, New York
February 19, 1999

- --------------------------------------------------------------------------------
B-62
<PAGE>

APPENDIX I--DESCRIPTION OF SECURITY RATINGS

MOODY'S INVESTORS SERVICE

BOND RATINGS

AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.

CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.

CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

SHORT-TERM DEBT RATINGS

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.

PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:

. Leading market positions in well-established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
. Well-established access to a range of financial markets and assured
sources of alternate liquidity.

PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.

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STANDARD & POOR'S RATINGS GROUP

DEBT RATINGS

AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC AND CC: Obligations rated BB, B, CCC and CC are regarded as
having significant speculative characteristics, BB indicates the least degree
of speculation and CC the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.

COMMERCIAL PAPER RATINGS

An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

DUFF & PHELPS CREDIT RATING CO.

LONG-TERM, DEBT AND PREFERRED STOCK RATINGS

AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB: Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB: Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B: Below investment grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
Duff & Phelps refines each generic rating classification from AA through B
with a "+" or a "-".
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
uneconomic/industry conditions, and/or with unfavorable company developments.

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<PAGE>

SHORT-TERM DEBT RATINGS

DUFF 1+: Very high certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
DUFF 1-: High certainty of timely payment, Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and Company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risks favors are
small.

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<PAGE>

APPENDIX II--GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.

DIVERSIFICATION

Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks (and general returns) of any one type of
security.

DURATION

Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.

Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate
risk only and not other risks, such as credit risk and, in the case of non-
U.S. dollar denominated securities, currency risk. Effective maturity measures
the final maturity dates of a bond (or a bond portfolio).

MARKET TIMING

Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.

POWER OF COMPOUNDING

Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth
of assets. The long-term investment results of compounding may be greater than
that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.

STANDARD DEVIATION

Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential.
Standard deviation is only one of several measures of a fund's volatility.

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APPENDIX III--HISTORICAL PERFORMANCE DATA

The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.

This chart shows the long term performance of various asset classes and the
rate of inflation.

EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY

[LINE GRAPH APPEARS HERE]

Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any asset class or any Prudential Mutual
Fund.

Generally, stock returns are due to capital appreciation and the reinvestment
of any gains. Bond returns are due to reinvesting interest. Also, stock prices
are usually more volatile than bond prices over the long-term.

Small stock returns for 1926-1980 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.

Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).

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<PAGE>

Set forth below is historical performance data relating to various sectors of
the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1988
through 1998. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.

All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees
of a mutual fund. See "Risk/Return Summary--Fees and Expenses" in the
prospectus. The net effect of the deduction of the operating expenses of a
mutual fund on these historical total returns, including the compounded effect
over time, could be substantial.

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

[CHART APPEARS HERE]

/1/ Lehman Brothers Treasury Bond Index is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/ Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
/3/ Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
/4/ Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by S&P or Fitch Investors
Service). All bonds in this index have maturities of at least one year. Data
retrieved from Lipper, Inc.
/5/ Salomon Smith Barney World Government Index (Non U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.

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<PAGE>

The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.

LONG TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-1998)

[LINE GRAPH APPEARS HERE]

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Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond
from 1926-1998. Yields represent that of an annually renewed one-bond
portfolio with a remaining maturity of approximately 20 years. This chart is
for illustrative purposes and should not be construed to represent the yields
of any Prudential Mutual Fund.

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<PAGE>

APPENDIX IV--INFORMATION RELATING TO PRUDENTIAL

Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1997 and is subject to change thereafter. All information relies
on data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.

INFORMATION ABOUT PRUDENTIAL

The Manager and PIC/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31, 1997. Principal products and services include life and health insurance,
other healthcare products, property and casualty insurance, securities
brokerage asset management, investment advisory services and real estate
brokerage. Prudential (together with its subsidiaries) employs more than
79,000 persons worldwide, and maintains a sales force of approximately 10,100
agents and 6,500 domestic and international financial advisors. Prudential is
a major issuer of annuities, including variable annuities. Prudential seeks to
develop innovative products and services to meet consumer needs in each of its
business areas. Prudential uses the rock of Gibraltar as its symbol. The
Prudential rock is a recognized brand name throughout the world.

Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, Prudential has
25 million life insurance policies in force today with a face value of almost
$1 trillion. Prudential has the largest capital base ($12.1 billion) of any
life insurance company in the United States. Prudential provides auto
insurance for more than 1.5 million cars and insures more than 1.2 million
homes.

Money Management. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in
assets under management. Prudential Investments, a business group of
Prudential (of which Prudential Mutual Funds is a key part) manages over $211
billion in assets of institutions and individuals. Institutional Investor,
July 1998, Prudential was ranked eighth in terms of total assets under
management as of December 31, 1997.

Real Estate. The Prudential Real Estate Affiliates is one of the leading
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers and agents and more than 1,400
offices across the United States./2/

Healthcare. Over two decades ago, Prudential introduced the first federally-
funded, for-profit HMO in the country. Today, approximately 4.9 million
Americans receive healthcare from a Prudential managed care membership./3/

Financial Services. The Prudential Savings Bank (FSB), a wholly-owned
subsidiary of the Prudential, has nearly $1 billion in assets and serves
nearly 1.5 million customers across 50 states.

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

As of November 30, 1998 Prudential Investments Fund Management was the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
- --------
/1/PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as one
of the subadvisers to The Prudential Investment Portfolios, Inc. and
Mercator Asset Management LP as the subadviser to International Stock
Series, a portfolio of Prudential World Fund, Inc. There are multiple
subadvisers for The Target Portfolio Trust.
/2/As of December 31, 1997.
/3/On December 10, 1998, Prudential announced its intention to sell Prudential
Health Care to Aetna, Inc. for $1 billion.

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The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.

From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in
surveys conducted by national and regional publications and media
organizations such as The Wall Street Journal, The New York Times, Barron's
and USA Today.

Equity Funds. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth Fund, a growth-style equity fund managed by Jennison Associates LLC, a
premier institutional equity manager and a subsidiary of Prudential.

High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase./4/ Non-investment grade bonds,
also known as junk bonds or high yield bonds, are subject to a greater risk of
loss of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.

Prudential's portfolio managers are supported by a large and sophisticated
research organization. Investment grade bond analysts monitor the financial
viability of different bond issuers in the investment grade corporate and
municipal bond markets--from IBM to small municipalities, such as Rockaway
Township, New Jersey. These analysts consider among other things sinking fund
provisions and interest coverage ratios.

Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.

Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
Mutual Fund.

Prudential Mutual Funds trades billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
Prudential's portfolio managers met with several senior U.S. and foreign
government officials, on issues ranging from economic conditions in foreign
countries to the viability of index-linked securities in the United States.

INFORMATION ABOUT PRUDENTIAL SECURITIES

Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1998, assets held by Prudential Securities for
its clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities./5/

Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment and financial
planning areas.

In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects/Financial Advisers SM, a state-of-the-art asset
allocation software program which helps Financial Advisors to evaluate a
client's objectives and overall financial plan, and a comprehensive mutual
fund information and analysis system that compares different mutual funds.
- --------
/4/As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.
/5/As of December 31, 1998.

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For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.

IV-3